July 9, 1991

PUBLIC ACCOUNTS COMMITTEE

(UNEDITED)

The Committee met at 10:00 a.m. in the Colonial

Building.

MR. CHAIRMAN (Mr. Hearn): Let me welcome you all

here, the people from the Auditor General's Department, Mr. Carew and his staff.

Today is a bit different perhaps from our regular Public Accounts Committee

meetings, usually we are zeroing in on some bad boys in certain departments or

agencies trying to find out why they did all these terrible things according to

the Auditor General. Half of the time we find out that the Auditor General was

not correct in his assumptions - I am only kidding.

We have had some good debates since we started, good

discussions on points raised about the accounts of the Province and why certain

things are done and why they are not, and why certain rules are not perhaps

sometimes complied with exactly. Sometimes there are good reasons, and what have

you but today is a little bit different. Basically, it is more or less an

information gathering session rather than trying to zero in on any real mistakes

or oversights, I suppose, made by departments or agencies and it is a matter of

disagreement as to how the financial statements of the Province are handled.

The Auditor General's Department feels that there are

certain omissions in the general accounts of the Province and the Comptroller

General and undoubtedly Treasury Board feel the method they use in accounting

for monies of the Province is the proper way to do it. We have had arguments

like this before and quite often we find out there is merit on both sides, but

when the issue is raised over and over, then we think perhaps sort of a public

hearing, a public discussion on the matter enlightens the people who are on the

sidelines saying: look what is going on here and why is there disagreement or

why are certain things not accounted for in the accounts of the Province or

whatever is published.

So, we thought it would be a good time to have a frank

and open discussion on the topic and consequently we have invited Mr. Carew and

his staff to come and certainly people from the Auditor General's Department. We

try to run our meetings very informally. We let the Auditor General have his say

first in relation to the comments he has raised in his yearly Report, then we

give the Opposition a chance to respond, and the Department or agency a chance

to comment, then usually we throw it open to Members of the Public Accounts

Committee, to people from either group of witnesses who want to comment and

hopefully, as I say informally and as orderly as possible, get all the facts and

figures on the table, then as we do our report at the end of the year we will

make our own comments.

A couple of things we have to do first before we get

into the hearings and that is the swearing in of people who have not appeared

before this Committee before.

I would also like to take the opportunity to introduce

to you the Members of the Public Accounts Committee who are here today. Staff

member, Elizabeth Murphy on my left is our acting research person. Elizabeth is

Deputy Clerk with the House of Assembly and does a tremendous amount of work for

our Committee at all times. Bill Ramsay to my left is the Member for LaPoile; on

my right Alvin Hewlett the Member for Green Bay; Glen Tobin the Member for Burin

-Placentia West; and the Deputy Chair now is Aubrey Gover the Member for

Bonavista South. The last time, I think, when we met publicly, Mr. Hogan was the

Deputy Chairman. Bill Hogan has since been elevated to Cabinet and Mr. Gover is

now the Deputy Chair.

So, with that I will ask Elizabeth to swear in anybody

who has not been sworn in. I will ask both groups to introduce the people with

them and go on from there.

Swearing of Witnesses

Mr. Bernard Carew

Mr. Raymond Gruchy

Mr. Ronald Williams

MR. CHAIRMAN: Now, Mr. Hart if you would like to

introduce, for the sake of all the people here, the members of your committee.

MR. HART: (Inaudible) and audit manager, David

Hill; when you are ready I am going to ask David, as we have been doing

recently, to read an opening statement which we have prepared.

MR. CHAIRMAN: Okay, first of all, I would ask Mr.

Carew if he would introduce his people.

MR. CAREW: Mr. Chairman, on my left is Mr. Ray

Gruchy, Assistant Comptroller General and on my right, Mr. Ron Williams,

Director of Government Accounting; John Martin, the Assistant Director of

Government Accounting.

MR. CHAIRMAN: Thank you very much. When you are

speaking, I would ask you to get as close to the microphone as you can; this is

not for amplification but strictly for the record, so years down the road as you

do your research, you can check into what you said and because some of your

voices may not be familiar to our secretaries, unlike the House of Assembly, we

ask you to identify yourselves.

I will try as I introduce each person, but the point

is when we get into a to and fro situation, I am sure during the day there will

be times when somebody mentions something that triggers a response or a comment

and your name may not be clear, so if you would just mention your 'Jones', type

of thing and go on from there.

With that, I will ask Mr. Hart, to have his staff,

whatever, comment on the comments and just again to reiterate, the discussions

today are I suppose, because of a disagreement in relation to procedures,

certainly we are not talking about, as I say, anything that the Auditor General

has perceived as being wrong with the accounts, with the bottom line of the

Province at all; it is a matter of the procedures used in determining, I

suppose, the financial state of the Province and it should make for some

interesting debate.

So, Mr. Hart, if you would-

MR. HART: Yes. Basically, I guess the reason we

are here this morning is, as you mentioned, it deals with a professional issue.

We advocate in the Department of the Auditor General

that the Province would be better served were it to use what is known as 'The

Accrual Basis of Accounting', and we will explain this a little later for those

who do not quite understand what it all means.

Presently, the Province is using a cash basis, or a

modified cash basis as they call it; there are basically two different concepts,

cash or accrual, and we will explain both shortly. We have prepared a written

statement to present our position and I will have David Hill, the Audit Manager,

read that.

MR. CHAIRMAN: Thank you. Mr. Hill.

MR. HILL: Thank you, Mr. Chairman; my name is

David Hill.

The Province prepares its financial statements on a

'cash basis of accounting', modified in accordance with the Financial

Administration Act, 1973. This Act provides for the inclusion of revenue from

received within thirty days from the end of the fiscal year.

Also, invoices received for payment by the Comptroller

General of Finance within thirty days from the year end, which pertain to

liabilities existing in that year end, are charged to expenditure in the year in

which the liability was incurred. In accordance with the accounting policies

used in the preparation of the public accounts, the balance sheet or statement

of assets and liabilities, is prepared, using net direct debt basis.

The objective of this presentation is to show the

Province's net direct debt rather than the accumulative amount of assets and

liabilities. The Province's net direct debt consist of total direct debts, less

the value of accumulated assets such as accounts receivable, loans advances and

investments; assets which are not considered to be convertible are not value.

The Province's Financial Statements present the

transactions of the consolidated revenue fund; as a result, the assets,

liabilities and operating results of Crown Corporations, Boards and Authorities

are not included, except to the extent their transactions impact on the

consolidated revenue fund.

In 1981, the Public Sector Accounting and Auditing

Committee or PSAAC as it is commonly called, through the Canadian Institute of

Chartered Accountants, was established with an overall objective to improve and

harmonize financial reporting, accounting and auditing in the public sector in

Canada.

To meet this objective, PSAAC issued statements that

recommend standards for good practice and financial reporting, accounting and

auditing in the public sector and also initiates research studies on public

sector accounting and auditing matters. The public sector accounting statements

and recommendations apply to all governments, unless their application is

specifically limited in individual PSAAC statements.

Our review of the 1989-1990 public accounts disclose

that there are a number of areas dealt with in the recommendations of PSAAC,

which have not been fully implemented by Government. We note in particular that

a number of specific PSAAC recommendations relating generally to the adoption of

the accrual basis of accounting have not been fully implemented. The majority of

with these recommendations.

PSAAC has also issued recommendations on accounting

for and presenting the transactions of crown corporations, boards and

authorities and Government's financial statements. As previously indicated the

assets, liabilities and operating results of these entities are not presently

included in the financial statements except to the extent there transactions

impact on the consolidated revenue fund. PSAAC has also issued recommendations

on accounting for employee pension obligations in Government financial

statements, the most significant of which would require the Province to record

unfunded employee pension liabilities.

In our 1989 annual report we noted that the

comptroller general had advised us that the implementation of these PSAAC

recommendations were in the initial stages of study. In February 1990, a

committee consisting of representatives from Treasury Board, the Department of

Finance, and Works, Services and Transportation was established to review PSAAC

accounting statements and recommend which policies Government should implement

in what time frame. Our office has been invited to attend the committee meetings

and to participate in its research which is at a preliminary stage.

We strongly support the process of establishing an

interdepartmental committee to review accounting issues relating to the public

accounts. To date this committee has not issued any recommendations. In our view

the effectiveness of this committee would be significantly improved if

additional resources were allocated so it could meet its objectives in a timely

manner.

In conclusion, the recommendations of the public

sector accounting auditing committee of the Canadian Institute of Chartered

Accountants are designed to improve financial reporting by all Governments in

Canada. The adoption of these recommendations will not only significantly

improve financial reporting by governments, but also make the financial reports

of all governments more comparable from year to year and from jurisdiction to

jurisdiction. Thank you, Mr. Chairman.

MR. HEARN: Thank you very much. Any other

comments, Mr. Hart?

MR. HART: No. I guess I will jump in when

necessary as we go along.

MR. HEARN: Thank you very much. Mr. Carew, would

you like to make an opening statement as the Comptroller General?

MR. CAREW: Mr. Chairman, we do not have a formal

opening statement as such. Our views and I guess the views of the government to

a certain extent were expressed in the departmental observations on the report

of the Auditor General which was tabled in the House at the same time. I do not

intend to go through the motions of reading that, but rather we will respond to

any particular questions or comments that the Auditor General and his staff or

the members of the committee may bring forward.

I will say that I agree with your opening remarks,

this is not an area where there is a great deal of disagreement. While we may

not agree with the Auditor General on every detail of PSAAC's recommendations,

by and large there is no serious disagreement. The difference, I guess, is in

matter of timing of priorities in an area or at least a time where we are under

severe fiscal restraints.

The resources we would like to devote to upgrading our

accounting and presentation of public accounts and so on have to necessarily

take second or third place, but we are moving, albeit somewhat slowly towards

most of the objectives outlined in PSAAC. We have maybe some slight reservations

on PSAAC's recommendation that the accrual method is all that much better than

the system that we are now using, but this is a fairly minor thing because I

think for reasons of conformity with all of the other jurisdictions we probably

will bring it in in the near future.

I might just note in passing that, I will give you an

example, Ontario which is a fairly large jurisdiction, the largest obviously

outside the Federal Government, still operates almost identically with our

method, and they have at the moment no plans to change it in the immediate

future. But here again, the differences in what we call the modified cash basis

and what some provinces call the modified accrual gets into a sort of splitting

hairs. I just want to emphasize again that we do not have a disagreement with

the Auditor General on this. As I said it is purely a matter of timing. Another

example I will give you before I stop and pass it on to somebody else is that

the question of recording the unfunded pension liability, which we have recorded

and shown it as a note to the balance sheet for some years now, we intend to

bring it into the body of the balance sheet and formally record it as a

liability this year, subject to any legal or legislative impediments that might

turn up, we do not see any at the moment. As for full accrual, I think, that is

maybe a year or two down the road. I think I will stop there because we may want

to get into further detail later on.

MR. CHAIRMAN: I have just one question before we

throw it wide open. What difference does it really make to the Province as to

whether or not you are using the method you are using or whether or not you have

full accrual? I am talking about, I suppose, the economic effect on the Province

in relation to our markets and what have you. Is there any effect on your method

of accounting?

MR. CAREW: Other than uniformity with other

jurisdictions I do not think it has much effect. For example, our financial

advisors have not been very forceful in asking us to go to a change in financial

statement presentation. From our conversations with Ontario and the other

jurisdictions, the financial community has not, as a general rule, taken this

thing up because, number one, I think they regard it as an argument among

accountants. I think by and large they feel that under the present method of

presentation you can get all the information you want. You may have to dig a

little bit for it or move around back and forth. For example, our presentation

of the accounts of boards, Crown corporations, and that type of thing in a

separate volume is under review and my own feeling is that, particular in a

small jurisdiction like Newfoundland, we should have all that in one volume, and

as far as consolidation is concerned, well that depends pretty well on bringing

in the accrual method anyway, although not necessarily. I do not think it has

any significant effect, certainly not on the economic view of the Province, the

financial view, or anything else for that matter. It is largely a matter of

uniformity with all Governments in Canada.

MR. CHAIRMAN: Mr. Gover.

MR. GOVER: Thank you, Mr. Chairman.

I have some general questions for the Auditor

General's Department and then I want to move more specifically on to one of the

issues of concern in these set of comments. I understand when the Auditor

General reviews the financial statements of the Province he has to express an

opinion in accordance with generally accepted accounting principles along with

the other criteria that have to be used. I notice that PSAAC is a committee of

the Canadian Institute of Chartered Accountants and I notice on Page 35 of the

report the statements and recommendations that PSAAC issues apply to all

governments unless their application is specifically limited by the PSAAC

statements. I take it from that, and you can correct me if I am wrong, that the

statements by the Public Sector Accounting and Auditing Committee of the

Canadian Institute of Chartered Accountants form the basis for the generally

accepted accounting principles used in determining whether our financial

statements accurately reflect the financial situation of the Province. is that

not correct?

MR. CAREW: That is basically correct, yes.

MR. GOVER: So, the statements issued by PSAAC form

the body of these generally accepted accounting principles, and what we have

here in this comment, or the substance of the comment, is that a number of these

particular recommendations are not being followed by the Government of

Newfoundland and Labrador in the presentations of its financial statements. Is

that correct?

MR. CAREW: That is correct.

MR. GOVER: Specifically, I suppose, one of the

ones that concerns me, although there are a number here, is public sector

accounting statement No.5, dealing with the employee pension obligations of the

Government on the financial statements. I take it that this particular

statement, statement No.5, is not being fully complied with.

MR. CHRIS HART: No, right now the Province

discloses by way of a note to the financial statements the unfunded pension

liability. PSAAC would require that that be actually recorded as a direct

liability, in addition to other things. That is the major thing we are talking

about.

MR. GOVER: Yes, but I take it from page 73 of your

report, the reporting of the unfunded liability in a note to the Financial

Statements -

MR. CHRIS HART: Is not adequate disclosure.

MR. GOVER: That is one issue.

MR. CHRIS HART: Yes .

MR. GOVER: But there is also another issue which

is reported on page 73 to this effect: the statement of revenue and expenditure

does not reflect the actual value of pension benefits earned by employees during

the year. It reflects the Province's contribution to the pooled pension fund on

a cash basis in accordance with existing accounting policies as disclosed in

note one of the Public Accounts.

MR. CHRIS HART: That is right.

MR. GOVER: So I think we understand what the

unfunded liability issue is about. But what is this particular issue about?

MR. CHRIS HART: The second issue deals with the

recording of the expenditure. The first issue is the liability that arises as a

result of transactions of the pension fund over the years. The second one deals

with what would be the cost per year of pension for government. And under PSAAC

the cost that would be reflected would be the actual pension earned by retired

employees in that given fiscal year, not the year that it was actually paid. The

present government accounting just records actual payments of pension in the

year that it is paid as an expenditure and that is what goes through the

statement of revenue and expenditure. PSAAC would have it recorded as the

liability became due. So right now as we are sitting here there are people out

there who are earning pension they are entitled to, every year service that they

put in there is a pension amount earned. Under PSAAC and under the accrual basis

of accounting you would be reflecting your cost at the time they are earned not

when they are actually paid. This is one of the basic differences in cash, and

accrual basis of accounting.

One thing I should mention here that may clarify

things for you somewhat: last year in the 1990 Public Accounts there was a $21

million payment to the teachers' pension fund over and above normal payments.

This was money put back in to cover part of the deficiency of the teachers'

pension fund. This $21 million then, because the Province is under a cash basis

of accounting, became an expenditure, a current account expenditure for the

year, so therefore the Province's financial statements, if you want, or their

income statement, revenue and expenditure, showed $21 million less than it would

have, had that decision not been made to put that $21 million into the fund.

So those are the sort of gyrations you get into, and

that is, I guess, where we have concerns with it. There are fluctuations caused

by other than economic decisions. We believe economic factors should determine

the bottom line in a set of financial statements, other factors are certainly

going to be there, but they should not affect the bottom line. Under accrual

accounting that $21 million would have reduced the liability which would have

been set up under accrual accounting.

MR. GOVER: Yes.

MR. CHRIS HART: It would not have appeared as an

expenditure.

MR. GOVER: Let us just go back. The two are

somewhat related are they not? Because what we are saying here is that as each

second ticks off employees in the public sector are earning pension benefits

which are not payable today or are payable at some point in the future.

MR. CHRIS HART: No, that is right.

MR. RAMSAY: They are a liability.

MR. GOVER: They are a liability. And that future

liability is not reflected in the financial statements directly. The only thing

that is directly affected is the actual cash payout.

MR. CHRIS HART: When it is paid it is reflected -

MR. GOVER: Yes, to cover pensions.

MR. CHRIS HART: Yes, under current accounting

practices it is only recorded as paid.

Whereas accrual accounting would have it

recorded when actually earned.

MR. GOVER: So is this future value of liability,

this future liability is that reflected in a note to the financial statement?

MR. CHRIS HART: Yes.

MR. GOVER: It is.

MR. CHRIS HART: Yes.

MR. GOVER: Okay.

MR. RAMSAY: (Inaudible). Is it reduced according

to the expenditures made? If there is a given pension expenditure in a year -

MR. HART: Yes.

MR. RAMSAY: - is that then deducted from the

pension liability?

MR. HART: No, because the pension liability is not

set up. So any payments that are made are just charged directly to expenditure,

and there is no recognition if you want in a sense in the accounts of the

Province as to what the liability is.

MR. GOVER: So with the $21 million that was paid

into the teachers pension plan last year, there is an expenditure out of current

revenue -

MR. HART: Of $21 million, over and above the

regular pension payments to employees or ex-employees.

MR. GOVER: So there is an expenditure, but there

is no corresponding reduction in liability?

MR. HART: No, because the liability is not set up

anyway. The note reveals the amount of the unfunded pension liability so

presumably when that $21 million was paid it would reduce the unfunded pension

liability and the next time there is an actuarial adjustment, certainly the

liability would be reduced by that amount. But because the actual pension

liability that exists today is not booked anywhere, it is not shown as a

liability of the Province, well then when that payment of $21 million is made

there is no liability account to apply it against and reduce that liability

down. So, all you are seeing is the notes to the financial statements, which

reveal the amounts of the unfunded liability just for the reader for disclosure

purposes. But from a financial statement point of view the only thing that you

are going to see in there actually recorded is a $21 million expenditure shown

as expense for the year.

MR. GOVER: So, I guess what we are talking about

here is the ability of a lay person, the reasonably intelligent or the

reasonable taxpayer, being able to pick up a set of these statements and see

what the financial position of the Province is. If that is what we are trying to

do, and I think that is what we should be trying to do since it is the taxpayers

money, the number of notes at the end of the financial statements make it more

difficult for the average taxpayer to understand what is happening, is that

correct?

MR. HART: Well, the notes are an integral part of

these statements and are designed to clarify it rather then confuse it, I

suppose, but I can see where you are coming from. One of the recommendations

that PSAAC makes is that notes should not take the place of proper accounting

treatment for actually booking a transaction that has taken place. You cannot

get away with disclosing anything by way of a note that is outside the actual

body of the statements.

MR. GOVER: That is my point. If I was the average

citizen and I picked up the Public Accounts of the Province and I started going

through it, just by going through the statements I do not get an accurate

financial picture without understanding the notes attached to the statements.

MR. HART: That is our position, I guess, pretty

well. The problem from our point of view, Mr. Gover, is that we have to follow

generally accepted accounting principles and PSAAC has been established now to

make recommendations relating to government financial statements. We believe the

Province should be given adequate time, we cannot just expect these

recommendations to be made and implemented fairly quickly, there has to be

enough lead time to get them in. But there comes a time when we are going to be

put in a position where as a professional auditing firm, if you want, we are

going to have to make a decision as to whether we in fact would have to consider

qualifying the financial statements of the Province, which we would be very

reluctant to do obviously because that would effect their rating and so forth

and we would have to be on fairly strong grounds. But where most of the other

Provinces have now adopted accrual accounting to a large extent, I think one

exception mentioned was Ontario, but Ontario has tended in the past to be a

little bit on their own in some regards, I guess, all you have to do is look at

their budget this year as an example.

We believe that generally they have been accepted now

throughout Canada and the Federal Government have qualified the financial

statements of Canada for a couple of years and this year past was the first year

the qualification was dropped in a couple of years. They qualified partially on

the basis that they were not following all of the PSAAC recommendations.

MR. GOVER: I understand, that goes back to the

first questions that I asked. So, your governing organization has made

recommendations and these recommendations are not being completely followed

which is putting you -

MR. HART: Yes. What I am trying to do by

mentioning it in our annual report is to give the Department of Finance

reasonable notice that it is a concern with us and they should take whatever

measures they feel are necessary, if they agree. I do not think there is any

basic disagreement, as they said, it is primarily on the timing. I understand it

is going to take some time but there are others that really when it comes down

to it at the end of the year it would be simply a matter that they have the

information there, just make a couple of journal entries so to speak. It is not

a massive undertaking, in that regard, you know the bulk of them. There are a

number of issues that are going to take some more study but we will get into

those later I am sure.

MR. GOVER: I only have a couple of questions and

then I will conclude, but just to boil it down, this problems amounts to this,

right now what the financial statements primarily reflect is the amount of money

paid out to current pensioners and the amount of contributions going in by the

Government and by people paying premiums.

MR. HART: I did not catch your question.

MR. GOVER: The expenditure side is what is going

out currently to pensioners.

MR. HART: Yes, what is currently being paid to

pensioners?

MR. GOVER: And what is being reflected as going in

is employees contributions, current contributions, and the Government's

contribution.

MR. HART: Yes, Government is matching the

contributions of employees.

MR. GOVER: And what the statements do not really

adequately reflect, according to PSAAC, is the future liability that is

accruing.

MR. HART: Well, it has to be paid in future but it

is a liability that is earned right now, today, and if you have ten years

service with Government you are entitled to -

MR. GOVER: And according to PSAAC these are not

adequately reflected in the statements as they presently are presented.

MR. HART: Exactly.

MR. GOVER: Exactly.

MR. HART: Okay.

MR. GOVER: Now, my next question is for Mr. Carew.

Mr. Carew indicated that next year the unfunded pension liability will be

brought into the statements, which I guess is in keeping with the recommendation

put forward by PSAAC, but what about the second issue, which is that the actual

value of pension benefits earned by employees during a given year should be

brought into the financial statements as well? That is the second issue.

MR. GRUCHY: I guess we have discussed a lot of

different things here and I think it is coming down to a situation where you are

looking at the balance sheet which looks after the unfunded liability and your

statements of revenue and expenditure which looks after the cost of service, if

you like, for pension purposes. The balance sheet of the Province now, as we

determine, does note the net unfunded liability for pensions, and as Mr. Carew

stated earlier we will be recording that on the balance sheet this year unless

prohibited by legislation. The expenditure side, looking at what it actually

costs, like we are all accruing pension here now, people who are eligible for

pensions, that gets more accurately reflected in the pool pension fund. There is

a separate set of statements which are used for the pool pension fund. The

amounts that are shown in the Public Accounts are the contributions that are

made to the pool pension fund, so that expenditure does get shown, but what does

not get shown is, for example, what would my pension be is I were to get to

retire and collect a pension, I guess. That depends on a number of actuarial

valuations, actuarial studies, and this information is a highly specialized

area. As I said, that is not reflected in the Public Accounts, it is just the

contribution that is made to the pool pension fund that is reflected there. The

pool pension fund does take into account any actuarial costs and so on that may

be required to fund the pension for all civil servants, that type of thing. I do

not know if that clarifies it or confuses it a bit.

MR. GOVER: I think it does when you are saying

that the pool pension fund is a separate set of statements.

MR. HART: That is correct.

MR. GOVER: I understand what the objective here

is, that instead of being a separate set of statements that should be brought

directly into the financial statements of the Province. Is that correct, Mr.

Hart?

MR. HART: Basically, the way I see it, is that the

separate set of statements for the pool pension fund is just set up as a trust

account, if you want, to ensure that the pension contributions are going into

this fund and it is a way of just keeping it separate from other Government

accounts, but the concept of costing, what the cost is for Government, is the

issue that PSAAC is talking about. PSAAC is saying that you should show, as your

cost for the year, the cost of pensions earned in the year, and not what is

actually paid. What is happening today, as I said, is that it is only recording

the actual payments going out. As an example, as I said, $21 million was paid in

1990, so that made the current revenue account look $21 million worse than had

that decision not been made. It could just as easily have been nothing paid in

or it could have been $100 million, and that is the whole issue with us, the

fluctuations that can take place under this present system. If you are on an

accrual basis that does not happen because the payment gets charged to a

liability and reduces the liability, and the expense of the province is what is

actually the cost for that year. Whether it is paid, not paid, partially paid or

whatever, it does not matter, it is what is actually earned, and that is

basically the theoretical difference in cash accounting and accrual accounting.

That is the whole issue at stake here.

MR. CHAIRMAN: Mr. Ramsay.

MR. RAMSAY: I suppose, to be the devil's advocate,

if we take this money, this $21 million or so, that could possibly be used under

cash accounting in a manipulative form as far as trying to change at the end of

the year the relative version of what the province's financial position looks

like, if that $21 million, as you say, the day after the financial statements

were closed off was entered into the next years. So therefore you could make the

province actually look $21 million better than the previous year and then in the

next year spend the $21 million that you have in surplus, and it does not show

up until that year's expenditure later on another twelve months hence. So it can

be manipulated a lot more easily than accrual accounting, is that correct?

MR. HART: Well, I certainly would not use that

word because it is not one that I like, but I guess the whole point is that

under a cash basis, if money is received or paid one day after the fiscal year

ended it has the effect of distorting it from one year to another. Under an

accrual basis you reflect what is actually earned and what is actually payable,

and therefore you get rid of those fluctuations.

MR. RAMSAY: But in general, like with accrual, the

balance would be there, but under cash because a lot of it is not shown unless

it is shown under - if we note, in the public accounts - is it the notes at the

beginning there? I forget what you called it.

MR. HART: Notes on the financial statements.

MR. RAMSAY: No, not the notes on the financial

statements. Excess of revenue over -

MR. HART: Excess of assets over liabilities? The

second statement.

MR. RAMSAY: Yes, I remember you mentioned it in

that other meeting.

MR. HART: Yes, okay.

MR. RAMSAY: That aspect of the whole thing, unless

you reflect on that you do not really get the full picture from a stand point of

the public disclosure I guess.

MR. HART: One of the other problems, it is all

inter-related, but the statement of revenue and expenditure is basically on a

cash basis modified in a number of ways. The balance sheet, they attempt to show

that on an accrual basis, except the unfunded liability is not reflected there,

but generally speaking it is on an accrual basis. So you have your income

statement on a cash basis and you have your balance sheet on an accrual basis,

and this other statement in between called the excess of assets over liabilities

is an attempt - not an attempt, it reconciles what happened from the cash basis

back to the accrual basis.

So if you were under an accrual basis of accounting

you would not have to go through this reconciliation process, it would

automatically happen. Your second statement, instead of being called an excess

of assets over liabilities would almost be like a statement of retained earnings

in ordinary business practice, and a lot of expenditures now that go through

that are not highlighted in the current account of the Province, and you know

really when you look at the current account revenue and expenditure you should

expect to be able to determine how a province performed for that year because

that is the figure that generally most people look at. Now what is happening in

this case is there are a number of expenditures that do not show up in that

because of not being on the accrual basis of accounting in part and also -

MR. RAMSAY: They might be (inaudible) because they

do not affect the consolidated revenue fund. Is that correct?

MR. HART: Let me just give you an example. When a

province goes out and borrows loans to cover its needs for a fiscal year, it

often borrows in the US market or the Japanese market, or wherever, and in doing

so they may run into a situation where there are currency fluctuations, so when

they actually have to pay that, quite often there will be a foreign exchange

gain on the transaction or it may be a loss on the transaction; it could be

either.

Now when there is a gain or a loss, those are not

reflected through the current accounts of the province; they are reflected

through this excess of assets over liabilities, and really, it is a cost or a

gain, one or the other, it does not really matter in my opinion, but if you want

to know the true picture of how a province did in that year, that is part and

parcel of where it stood.

Another issue with this is in terms of the province

putting money in sinking funds to pay off these debts when they become due; now

all of the interest money that is being earned in that sinking fund is not being

reflected as a revenue of the province, so that is revenue that would

ordinarily, under accrual accounting, be there and make the picture look better.

So there are all these little things that could add up to a significant amount

or, they may not in a given year, you do not really know, but unless you reflect

them all in that respect, you know, you are going to have these fluctuations.

MR. RAMSAY: I have just one more question, Mr.

Chairman, before you recognize someone else.

Concerning the year end again, just to revisit that, I

note in your statement in the first paragraph you mentioned that invoices

received for payment by the Comptroller General of Finance within thirty days

from the year end, which pertain to liabilities existing at year end - okay, so

the key point is 'received'.

Invoices received pertaining to liabilities existing;

now there could be liabilities existing with no invoices received that are not

charged, and I am just wondering, in this case if the invoices are received they

are charged to expenditure in the year in which the liability was incurred, so

in cases like that you would have those invoices that make it let us say, in

time, because I know there is usually a rush, a government wide rush to get your

travel claims in, to get your different invoices in place within the thirty day

period.

If you fail to, and seek payment afterwards, that

payment is then reflected in the next year's -

MR. HART: In the following year, yes.

MR. RAMSAY: - financial statements.

MR. HART: The thirty day rule is put there to

recognize that there are expenditures which take place and are not paid for, and

that is where the modified cash - so it is not cash completely, if it were cash

completely whatever was cut and paid at the end of March, that would be the

expenditures that are shown, but the Financial Administration Act contains the

provision for the thirty days.

But now that thirty day rule really helps in terms of

ordinary services that are provided and expenditures that take place, but there

are many other major things that happen outside of that. I think last year when

I looked at it there was $12 million in, as you said, vouchers that did not make

the Comptroller General's desk or did not get reflected, so there was $12

million that will be charged in the following year, but now it is offset

somewhat by the fact that in 1989, there was $14 million, so your net effect is

basically $2 million, but this fluctuates from year to year.

But now one good example that you might understand

clearly is in terms of the Province's loans again. In most enterprises at the

end of the year what they will do will be to determine how much - a loan payment

may take place, let us say on March 1st of the year, so then you have the rest

of the month of March costing an enterprise that is not actually paid until

April 1st. Now the interest on that long term debt is very significant in the

Province's case; it is shown on the balance sheet because they reflect that on

an accrual basis, but in your revenue and expenditure, that interest expense

does not get reflected in the financial statements.

Last year in 1990, there was $166 million of interest

owing at the end of March that did not get shown as an expense for that year,

and again there is an offset from what is there for 1989 as well, because in

1989 the same situation existed; in that year there was $159 million owing and

$166 million in 1990, so there was a $7 million effect last year alone that

under ordinary accounting policies would have been charged to expenditure, so

those are the sort of things that you are getting into by not being on an

accrual basis.

MR. RAMSAY: Yes, okay. Thank you, Mr. Chairman.

MR. CHAIRMAN: Mr. Carew, any comments on the

observations just before we move along to the next line of questioning?

MR. GRUCHY: I think as the Auditor General pointed

out there are a number of items that do not get through the revenue of

expenditure statement but I think it is most important to note that

Schedule L

of our Public Accounts does highlight and point out all of these accruals that

we were just talking about, like the March vouchers which are paid after April

30 and interest expense on debenture and other debt, for example if the payment

was made on March 1 and this type of thing.

So, for the informed reader of the Public Accounts

they can easily take the excess of expenditure over revenue on a cash basis and

adjust for the accruals as shown on

Schedule L to come up with an accrued

revenue and expenditure statement. I should also note the reason why we are

doing it this way is because we have certain restraints that are imposed on us

by The Financial Administration Act. The Financial Administration Act, which is

the guide to financial accounting, reporting and administration in the Province,

dictates that we do certain things and for that reason we are presenting the

public accounts in this light. In other words, doing an excess of expenditure

over revenue on a cash basis and then using a separate statement to do the

accruals. That is one of the reasons for it.

So, I guess, as was mentioned earlier we are moving

towards getting these accruals in the actual cash statement of revenue and

expenditure. But again it will require legislative change to The Financial

Administration Act to do that. I would like to note that all of these

disclosures are made in the financial statements and an informed reader can

calculate what the accrued net expenditure over revenue would be. Does the

Auditor General agree with that, except for the pension part of it?

MR. HART: No, the information is contained in the

volume that is commonly known as the Public Accounts but the financial

statements themselves on which we express an opinion do not include all of those

schedules, including

Schedule L.

Schedule L is in fact a

schedule of accruals

and it discloses the figures that I just mentioned, but I mean you should not

expect a reader, informed or otherwise, to have to look at a financial statement

and then go back and make all of those adjustments themselves. We are

professionals and we should be providing that information in as readily

available and readable form as we can without expecting someone to have to take

them and go through all of these calculations themselves.

There is another issue which I noted when I was

looking through, an accounting issue, that goes through the excess account and

that is when the Province makes investments in various organizations they end up

on the balance sheet as an asset of the Province. However, when that asset for

whatever reason turns sour or becomes uncollectible - we have had a couple of

good examples over the last couple of years, we have had Newfoundland

Enviroponics Limited in which the Province lost $22 million and last year, I

think it was, the Bay Verte Mines, an investment of $32 million in that one.

Those costs do not get reflected in the statement of revenue and expenditure of

the Province again. They go through this excess account. So, you cannot readily

look at the current revenue and expenditure account and determine the actual

position of the Province in terms of how it performed for that year. Again, that

is another separate accounting issue. Those are the types of things that cause

us all sorts of headaches.

MR. CHAIRMAN: Mr. Hewlett.

MR. HEWLETT: Thank you, Mr. Chairman. I must

confess I have two university degrees, but not one in accounting or economics or

whatever, and I dread my monthly bank statements.

MR. CHAIRMAN: This is to your advantage.

MR. HEWLETT: So I am trying to hang on

intellectually to what is going on here, by my fingernails, I suppose.

The Auditor General's people said something to the

effect that they might be put in a position where as a professional group they

would have to qualify the public accounts of the Province. But at the same time

Mr. Carew's group has indicated that our financial advisers and whatnot were

generally well apprised of our total situation and we are not sort of ringing

any alarm bells. But I am wondering of Mr. Carew or his group there, if such a

qualification did take place based on the accounting notions of the auditors and

so on, would it possibly in effect lower the Province's rating or change it in

some way that it could damage the financial position of the Province or would,

this may be a judgement call in your case, would it be a situation where the

money people in New York look at it and say: well nothing is changing this year

until now except there is a statement issued by the Auditor General to the

effect that what has been going on and is still going on is not being reflected

in a certain accounting way. Would it seriously impact us?

MR. CHAIRMAN: Mr. Carew.

MR. CAREW: Mr. Chairman, it is a bit hypothetical,

but it would depend obviously on the nature of the qualification by the auditor.

But if it were simply a technical qualification that the accrual method is

better or non-compliance with PSAAC and so on, we have had these, they are not

qualifications, we have had them in the report. I would be speculating if I said

it would affect our credit rating, for example, I do not think it would. I think

what would affect our credit rating seriously would be if a qualification were

to the effect that a significant liability were omitted and not disclosed, there

were some serious deficiencies in recording or handling of our monies, and so

on. But to answer your question I am not certain that it would. The Government

of Canada's accounts were qualified, I think the year before last and so on, I

do not think it had a serious affect on the credit rating. I would think the

budgetary position of Canada would have a far greater effect on the credit

rating than the - but I again wish to emphasize that we do not want any

qualifications to the audit report, and we agree with what the Auditor General

is saying. As I said it is simply a matter of getting the thing done and it does

take a couple or three years to convert from the cash system that we have had

since 1899, I guess, over to a full accrual system. We will get there. The

question is how much money are we going to have to devote to resources? I will

give you an example. In our branch of the controllers office which looks after

financial controls and so on we have about eighty positions, I guess, and only

three of these eighty are directly involved in the production of the public

accounts themselves. Now we bring in extra resources at the end of the year, and

so on, and we move them from other departments, but if we had say another

$100,000 or $150,000 to hire two or three more professional accountants on a

full-time basis to devote to this type of research and development of the public

accounts, we would probably have reached, right now, the position that we may

not now until another two years.

MR. CHAIRMAN: Mr. Hewlett.

MR. HEWLETT: One other point, I do not know who

should answer this, there has been a lot of talk about the unfunded liability of

our pension situation. But for my own clarification are pensions today paid out

of the general revenue of the Province or are they paid out of this pooled fund

to which employees make contributions and the government makes lump sum cash

contributions or is this a matter of handling on paper? Are pensions actually

paid from the general revenues of the Province as such?

MR. CAREW: No, they are paid from the pension

fund. The Province pays the money into the pension fund and all the pensions

that are paid out to the pensioners come out of the pooled pension fund.

MR. HEWLETT: I would gather that the problem that

we have at the current time is that there has been considerable liability

accrued by the actual cash value in that pool at the moment. If everybody were

to retire instantly, theoretically speaking, then there would be insufficient

funds in that pool to pay out the pensions and so on.

MR. HART: Yes, that was the reason for the note

being put in there which details when the fund under the present rate of

contributions is likely to be in a deficit or surplus position and it breaks it

down into the various funds. I would agree with the Auditor General that

certainly that should be shown in the body of the accounts rather than in a

note, and we will certainly do that subject to any impediments or otherwise.

MR. HEWLETT: One other question, Mr. Chairman, the

Auditor General mentioned Newfoundland Enviroponics a little while ago. A lot of

businesses I guess in Newfoundland over the years have been started or at least

been allowed to survive through the use of guaranteed loans from the Government.

If the Government guarantees a loan to company X is that shown anywhere in our

accounts per se or does it only become a thing on paper once it goes into

default and someone has to pay it back? Is a guaranteed loan an outstanding

liability and showed as a potential debt of the Province?

MR. HART: (Inaudible) liability in there

adequately disclosed in the public accounts now and only when you have to pay up

on it do they become an expenditure of the Province. A good accounting practice

would have those reflected as contingent liabilities not as actual, because

there is no way of knowing - it is a potential liability but it is not an actual

liability as opposed to the pension liability which is a known existing

liability. An advance to XYZ company could turn into a cost but hopefully it

will not.

MR. HEWLETT: Where would a contingent liability

lie, so to speak, in an accrual method of accounting?

MR. HART: It would be identical as cash or

accrual because under an accrual basis you reflect liabilities when they become

due, so a loan to a company outside the Province would not result in any

liability until such time as it became apparent they could not repay. Maybe

there might be a slight difference in timing if for example it became apparent

that a company may not have the ability to meet its obligations and pay back the

money to the Province, the Province might become aware of that and set up what

would be called a provision for that, and then that would be reflected in the

accounts for that year rather than wait until it is actually paid out a year

later or something like that. So, that would be the only slight possibility of a

difference.

MR. HEWLETT: Thank you.

MR. CHAIRMAN: Mr. Ramsay.

MR. RAMSAY: It is the same now in cash and

accrual based on the contingent liabilities but as was noted with the

Newfoundland Enviroponics, as Mr. Hewlett mentioned, when it is paid out there

is a variation from cash and accrual. Is that correct? When the payment becomes

due.

MR. HART: No.

MR. RAMSAY: When the payment is made. Now, you

noted there was a provision in the financial statements of assets over

liabilities or liabilities over assets or whatever that allowed for the various

things like the interest from the sinking fund or whatever, that was in a

different area. On an accrual basis would that also be the place where those

figures would be entered.

MR. HART: I guess what you have to do is look

at the type of liability we are talking about. In terms of pension it is money

that is owed. There is no question about it, the money is owed, it has to be

paid down the road somewhere. In respect of a contingent liability, the reason

it is contingent is because the Province has guaranteed that if that company

cannot pay its obligations then it will move in and pay them itself. So, in 90

per cent of the cases the Province never has to get involved at all. You cannot

book that liability because it is not an existing liability. It is only when

facts or circumstances make you aware that yes we have a problem here, if they

are put into bankruptcy or something like that then you can sit down and make a

reasonable judgement that okay this looks like it is going to cost us $20

million. At that point in time under an accrual basis of accounting you could

sit down and set up what is called a provision for a poor investment or a

doubtful account. What I am saying is the only difference would be in timing,

and the timing difference should only be in respect of maybe a year at the most

on a contingent liability. So contingent liability is contingent upon some other

event happening,

whereas in an actual liability there is no question.

MR. RAMSAY: My question basically was that once

the amount is paid in a case like that against a contingent liability, is it

then, like the way the clientele's statements now are, you know like

Newfoundland Enviroponics or whatever, a fish plant that had a loan guarantee,

when that amount became payable is it reflected under accrual accounting the

same way that it is reflected in here, or in a similar manner?

MR. HART: Going back to the example, I said if

they recognized the problem existed a year earlier and set it up as a provision,

then when it was actually paid the following year it would be charged back

against that provision so you would see it going through the income statement in

the year that they recognized the liability existed. But if they did not

recognize it at all it would be the same exactly with an accrual and a cash.

MR. RAMSAY: Okay, so where the Newfoundland

Enviroponics one is in this thing, or like you said whatever of that kind of

debt is in here, it is there but it was not as an expense in the given year.

MR. HART: No, well that is not an accrual basis

problem versus cash, that is just an accounting treatment. It has nothing to do

with the accrual versus cash. What they did from an accounting point of view is

they said we paid the money out but we are not going to show it as a current

account expenditure, we are going to show it in a separate statement in the

excess of assets over liability statement. It is not a non-budgetary item or

whatever, it does not form part of the current accounts of the province. To me,

I think regardless of the nature of the expenditure, a good accounting statement

would have the whole picture in one statement rather than isolated in different

places, and most people focus on this current account position of the Province,

so I think it is important to know what -

MR. RAMSAY: What it means.

MR. HART: Right. If you had a situation where

the Province had to pay out massive amounts of money because of bad investments,

well then those should show up as costs of your current account, in my opinion.

MR. CHAIRMAN: We will now take five or ten

minutes to get a coffee and stretch our legs, then we will come back and see if

there is anything else.

Recess

MR. CHAIRMAN: Order, please!

Just to kick it off again, a couple of comments that

were raised probably zeroed in on some of the problems. Mr. Carew mentioned the

unavailability, I suppose, of personnel to put all the plans in place to try to

switch to the accrual method as quickly as we would like to do. Was your

division hit by the recent cutbacks?

MR. CAREW: Mr. Chairman, I think if you were

trying to get a travelling claim out of the government you may have seen

recently that things slowed up quite a bit. We were cut quite a bit in the

government accounting section, and like all government departments we were not

excepted. We are managing to get out payments on time and so on, but we have

absolutely no money at all for - I hesitate to class this as a luxury item but

it certainly is an item that has to be put on the back burning in order to get

the day to day payments out on time and do the things that we were required to

do, so, you know, I am not using this as an excuse or saying that we were

unjustly penalized in staff cuts. The cuts were not as harsh, I guess. as other

departments had to endure so, we are living with it.

MR. CHAIRMAN: But it will have an effect on what

you can do like anybody else certainly.

MR. CAREW: Oh certainly, yes.

MR. CHAIRMAN: One other thing; in June, 1990, I

noticed there was a committee set up with representatives from Treasury Board,

the Department of Finance and Works, Services and Transportation, to review the

PSAAC accounting statements and to make recommendations; how active has that

committee been, is its work ongoing or has it been put on the shelf?

MR. WILLIAMS: I am Chairman of that Committee and

we have had in the last year I believe, two meetings; at the present time we

have a sub-committee actually doing an assessment of where the other provinces

are, and how they handle the conversion from the cash basis to the accrual

method. That process is rather slow because of the lack of devoted resources to

it and that is where we are at this present time.

MR. CHAIRMAN: But it is still there?

MR. WILLIAMS: It is still there, yes, we are

plodding along.

MR. CHAIRMAN: There is one other point. Treasury

Board has been mentioned here and Treasury Board undoubtedly plays a fairly

important role in all of this and we were contemplating having perhaps Treasury

Board appear with you, then we said well, we will have an open discussion first

and then if we thought it necessary, invite some people in from Treasury Board.

What part does Treasury Board or the President of

Treasury Board perhaps, play as to the decision you make, as to how you do the

accounting for the Province? If you decided to go to the accrual method, have

they got to give you permission, can they say 'no', we want you to stay the way

you are, how instrumental are they in any decisions you may make?

MR. CAREW: Mr. Chairman, under the Financial

Administration Act Treasury Board has the ultimate authority as to the form and

content of the public accounts. In practice Treasury Board has not issued

directives and so on, which they have the power to do; they have, sort of

unofficially delegated to the Comptrollers Office I guess, pretty well all the

authority over the form and content of the public accounts. But a radical

departure from the cash to the accrual method of accounting, with all the

effects that that has, as a one shot affair anyway, on the Province's financial

picture and so on, obviously we would not do it ourselves without approval from

Treasury Board, and I would think that a major decision like that would probably

require Cabinet approval as well; but on the day to day issues of recording and

so on and format of the accounts, no, they pretty well let us carry the ball

there.

MR. CHAIRMAN: Mr. Ramsay?

MR. RAMSAY: Mr. Carew, with regards to the overall

financial position of the Province, I note as a politician that we often stand

and we say that we are $5.2 billion or $5.3 billion in debt and then we say, on

top of that, there is a $2 billion in pension and then there are other debts and

liabilities, what is the case, you know, once it is all added together, is there

an approximate figure that the Province's debt actually is, that may eventually

be reflected in the public accounts?

MR. CAREW: The only thing I can say to that

really, is that the Province's total debt is reflected in the public accounts;

it is there, as I said, you may have to dig a little bit for it.

MR. RAMSAY: (Inaudible).

MR. CAREW: No, no, it is there.

AN HON. MEMBER: (Inaudible) liabilities over

assets.

MR. CAREW: That is the net debt; the net picture,

but here again, that is a peculiar government concept because in a normal

commercial business or corporation you would look at it and say, well, whatever

your bottom line figure is, your surplus or deficit, but when we have this net

debt concept, we show all the Province's liabilities, certainly the main direct

and indirect debt and so on, but we do not show all the assets.

MR. RAMSAY: (Inaudible).

MR. CAREW: Oh no, no. They are recorded in another

statement but again they are shown as a nominal figure of one dollar, I think or

$1,000 whatever it is there.

In prior years, going back prior to the 1970s, we

showed these as an integral part of the balance sheet, you know we listed roads,

bridges, hospitals and all sorts of fixed assets. Now we only show them as a

memorandum account, but they are shown, nevertheless, as part of the public

accounts.

MR. RAMSAY: With regards to assets, something from

an accounting perspective, in a business assets are taken and depreciated for

tax purposes to try to determine the actual residual value of an asset. In

public accounting you are talking about something totally different because you

have something that does not have a business reflective value. You are talking

about a bridge, as Mr. Hewlett mentioned, and you are talking about a school or

whatever, and I suppose residual value is always very, very minimal. Maybe this

is one more for the Auditor General, your comment on it as well, if you were

taking an asset and then using depreciation things on it, would there be an

accurate picture of the assets to go against the given liabilities or the debt,

because if you are in business there is a corresponding value to the asset, but

in the public accounting sector you are talking about something that is a little

bit different and could we end up with something that is showing this huge

liability that does not necessarily correspond with the asset value.

MR. CAREW: Yes, there are several ways of looking

at it. I suppose the textbook definition of depreciation is an orderly method of

charging the cost of an asset to the various periods during which it contributes

to the earning of revenues. Now obviously you do not have that in Government

because if you build a road or certain other public works or infrastructure it

does not necessarily contribute to the earning of revenue, you are giving a

service to the public. What we do, of course, under the cash method is when you

pay for it you expense it then, you charge it off completely in the year in

which the disbursement -

MR. RAMSAY: (Inaudible).

MR. CAREW: Whether or not we would advocate

bringing in depreciation in the case of assets, certain assets are depreciated,

for instance assets in crown corporations and agencies or so on which are of a

quasi-commercial nature, they follow normal commercial practices, but how do you

determine the useful life of a road and so on? These problems come up and they

are presently being studied by another - I do not know if Ron is on that - the

committee on fixed assets which is carried mainly by public works and services

and so on.

I guess the main reason, other than the legal aspect,

which I think perhaps is lost sight of sometimes in why we use the cash method.

The Financial Administration Act is dealing principally with compliance with the

Budget, and it is an old Act. It started, as I said, back in 1899 and has been

amended since, but the fundamentals of how you record your cash payments and

receipts have not really changed in nature in the Act, at least, since it was

originally constructed so the Act itself needs a major reconstruction, which is

in the plans right now. We are discussing it with Treasury Board this very week

as a matter of fact, and we have certain drafts ready for submission to Treasury

Board, and they have their drafts and so on. It is a co-operative effort to try

and get a major revision to the Financial Administration Act, hopefully for the

coming session of the House. I am not that optimistic, but I would certainly

hope that we would have a major draft amendment ready if not for the fall

session, the spring session.

MR. RAMSAY: Or even (inaudible).

MR. CAREW: There has to be. Well there is a big

chunk taken out of it now with the new Auditor General's Act, so the time is

right to bring in a lot of these new and more modern things because we are

pretty well hog tied on this cash method to a certain degree. There may be

enough if you want to bend the rules and interpret the things rather loosely and

bring in accrual, but I do not think that we could depart from the present

system until there are major change made in the legislation to authorize us to

proceed in that manner.

MR. RAMSAY: Mr. Hart could you comment on that as

far as the assets and how that would reflect on the public versus the private

accounting methods. I know it is public accounting but when we look at assets

and that sort of thing using accrual would not - or is it PSAAC that has to

address this matter?

MR. HART: The issue of asset accounting,

particularly infrastructure and that sort of thing, is one that I think even

PSAAC have to wrestle with. They have issued some guidelines on it I think but

it is still not as clear cut as the other issues of setting up pension

liabilities for example.

AN HON. MEMBER: (Inaudible).

MR. HART: That is a research study, yes. They have

had a research study on it, they have not even issued a pronouncement on this

section on assets because they still have a committee that is wrestling with it.

My own feeling on the thing is that with assets of that nature I would not be in

any major rush to have Government go out and start setting them up and

depreciating them because there is no purpose in doing that, I think.

MR. RAMSAY: Putting them in how, at cost at the

value of a dollar or what way would be the best way of doing it?

MR. HART: Well, if they were going to establish

them at all my feeling would be that they just record them at cost. As far as

whether they depreciated or not then I think is really insignificant. The only

reason you would reflect them there at all at cost would be just to control them

more than anything. If you have them at cost then you would set up your

subsidiary ledger and for whatever cost is there, there would be a breakdown as

to what it consisted of and it would be a means or mechanism of just having

control over all of the fixed assets of Government, all of your calculators,

computers and that sort of thing.

Even regular accounting practices are not designed to

value assets at their market value or their replacement value, even in ordinary

accounting terms fixed assets are reflected at cost which may or may not be

equivalent to what their true value is. You could have a piece of land that you

bought back in 1920 that is showing on the balance sheet for $10 or whatever,

but today is worth $1 million, even regular accounting would not change that.

The idea of doing that is primarily to amortize the cost of the asset over a

period of time. It is a method of allocation not evaluation, I guess, is the way

it has been expressed in text books. So, the issue of fixed assets is not a

burning issue with us. We are more interested in looking at and seeing changes

in respect of reflecting liabilities that we know there are going to have to be

payments made out for and respecting interest earnings that are actually being

earned as we sit here today on the sinking fund that are not being shown as

current account revenue and the work on both sides.

Another one that we have is at the end of the year for

example there may be a significant amount of money owing from retail sales tax

collections, they are not reflected as revenue of the Province until the year

they are actually collected.

Again, there are issues going both ways, but I think

in the end if you go with the accrual basis of accounting there are limitations

even with that, but I think you could end up with a much more meaningful set of

financial statements that would give the reader a fuller picture than he has

today, rather than having to go through various gyrations to build up those

figures himself.

MR. RAMSAY: Mr. Chairman, I just have one more if

I could.

There has been talk of the two different issues and we

mentioned this in the in camera session, consolidation of the public accounts

plus the issue of accrual accounting versus cash accounting. Maybe if I could

get a comment from the Comptroller General about that? I know they are related

but they are necessarily, I guess, two different issues. You did mention

something about the consolidation that you would like to see in a small

jurisdiction like this everything brought together and likewise I know the

Auditor General has feelings on it and maybe get it on the record as to how you

feel we should proceed over the next while and how Government should approach

the two different issues.

MR. CAREW: Well, Mr. Chairman, I think it is a

laudable objective to go towards consolidation and obviously if you have the

consolidated balance sheet the format shows your overall position quite

concisely and so on, but there are a lot of practical difficulties. The first

one, of course, is that the issue of accrual accounting, you could conceivably

have consolidation without accrual accounting but it would be very, very

difficult. So, we would look at consolidation as a step beyond going full

accrual.

Some of the other practical difficulties are, and this

brings us into another aspect, the timeliness of the public accounts. Under the

existing system a lot of those accounts that are in Volume 11 of the Public

Accounts the boards, agencies, Crown corporations, if you will note some of

these are, I think, up to two years old when they get in because of lateness in

getting these financial statements done and in to us. So your consolidation

would be marred to a certain extent by the inclusion of some subsidiaries and so

on of accounts which are not up to date at all.

MR. RAMSAY: It certainly would bring everyone into

line in reporting in a reasonable period of time.

MR. CAREW: Yes, I think it probably would. It

would be a target date which you would have to meet. It might be a stick we

could use to beat some of the Crown corporations into getting their accounts in

on time. We agree with it absolutely. It is a good objective. When we will reach

consolidation, it will not be in my time certainly, but I think it has to follow

the full accrual to be practical about it.

MR. RAMSAY: Because you cannot mix the two methods

together.

MR. CAREW: You know you would have to make an

awful lot of assumptions, and I would not want to be the poor devil of an

accountant who was given the task of consolidating them.

MR. CHAIRMAN: Mr. Gover.

MR. GOVER: Yes, it seems that there is an

agreement between the Auditor General and Comptroller General on, I guess the

two major issues, one is that we should move to an accrual basis, the question

of timing and legislative changes, and secondly as Mr. Carew has indicated,

following accrual there seems to be an agreement that consolidation would

probably be a good idea. And these are the recommendations made by the Auditor

General and at least in principle there is agreement from the Comptroller

General that we should move in that direction on those two issues.

So I would just like to switch for a second from those

two issues with respect to the financial statement to one that I have always

been interested in, and that is the Auditor General has commented on page 83 of

his report about the presentation of the Estimates. The Estimates detail

expenditure on behalf of government departments, actual dollars laid out by the

government to individuals or organizations. But, of course, as legislators we

all realize that a significant amount of expenditure conducted by the government

is tax expenditure. Expenditure which while it does not require the outlay of

cash from the government to individuals and organizations by granting a tax

exemption or a deduction or preferential rates, it is in fact a transfer of

resources from the government to these organizations because it is revenue

foregone by the government.

I do not think in the financial statements of the

Province or in the preparation of the estimates there is any information really

which details the impact of these exemptions, deductions and preferential rates

on the revenue foregone to the Province and who benefits exactly from these

particular exemptions, deductions and preferential rates. So I wonder in the

future presentation of the financial statements of the Province and the

estimates is any consideration being given to outlining tax expenditure? I mean

I can remember several Federal elections ago when the NDP leader at the time

accused the Federal Government of promoting corporate welfare bums, by the

creation of what the public views as loopholes. And I think that if we are going

to give people a special exemption or corporations in particular, the impact

should be outlined for the members to see and to be debated in the House of

Assembly. So in future is there any consideration being given to outlining the

impact of these exemptions in either the financial statements or the estimates?

MR. CAREW: As far as the financial statements are

concerned I think it would be extremely difficult to quantify tax expenditure,

certain ones you could, and we already do, for example, where we write things

off and remit interest and that type of thing. But as to quantifying, for

example, the cost of exempting domestic fuel and electricity and that type of

thing, I do not think there would be much problem in showing that in the

estimates. I think to a certain degree in this past year's Budget Speech that

was outlined and certainly in the white paper or whatever colour paper it was

that government issued recently which was under discussion I think until the

30th of July, they go into quite a lot of analysis of the effects of, you know,

exempting certain items or certain classes of people and so on. I would think

the proper place for that would be in the estimates or in the budget document,

because it would be extremely difficult to work that into the accounting system.

You would have to make a lot of suppositions and, you know, guesses really.

MR. GOVER: Okay assuming that to be correct, I

have no reason not to, is there any consideration been given when the estimates

are prepared for a particular department, I suppose, in particular, in this case

the Department of Finance to outline what tax expenditures the Province is

making?

MR. CAREW: I really do not think it is within my

authority or ambit of my mandate to discuss. That is another thing that should

be addressed really I think to Treasury Board.

MR. GOVER: Treasury Board.

MR. CAREW: Yes. I do not have any policy authority

at all.

MR. GOVER: That is more in the policy authority of

Treasury Board to determine that.

MR. CAREW: I would say so, yes.

MR. GOVER: It is an interesting thing especially

as you indicated when we are in a period of tax reform, and when these things

come up for debate in the House of Assembly it is one thing to debate actual

expenditures from the government to individuals or organization, but, of course,

whenever you change a tax law it has some impact somewhere, especially when you

grant an exemption or deduction or a preferential rate someone benefits. And I

think that we should move to a system whereby when we start to grant these type

of exemptions and deductions that the legislators are in a position to debate

who should benefit from these deductions and whether the deduction is a

worthwhile thing or not. I mean, for example, if you broaden out the base of the

retail sales tax, obviously when you broaden out the base people are going to

pay taxes who hitherto have not paid them so it is going to have some impact on

certain user groups and it would be important to, I suppose, having some

information to debate when that comes up. So I guess some time in the future we

will have to have Treasury Board here or when Treasury Board is here we will ask

them about that particular prospect since it does not appear to be within your

particular jurisdiction.

MR. CAREW: If I might, Mr. Chairman, in addition

to Treasury Board, of course, the other side of the Department of Finance which

comes under the deputy minister handles the tax policy. All I do in my capacity

is collect it. They consult us obviously when they are making changes as to the

effect potential change may have on administration of a tax statute. But we stay

clear deliberately really in this office of being involved in the policy end of

it.

MR. CHAIRMAN: One key issue I guess, when we talk

about the accounts of the Province, liabilities and whatever, is the Teachers'

Pension Fund. What effect is that really having on the accounts of the Province,

and as it grows, unless it is addressed one way or another, what effect might it

have in relation to determining the real state of our finances within the next

few years?

MR. CAREW: Here again that is a sort of a border

area for me, but as far as the effect on the financial statements is concerned,

the note that we have here now, does disclose what is going to happen if the

contributions are not jacked up in so many years time and so on, so presumably,

if we go and disclose it on the balance sheet, the net unfunded liability for

pensions and so on, we would adjust it accordingly as we make estimates of what

the additional cost is going to be.

Other than that, the effect on the Province's overall

financial picture is sort of getting into the policy area again, because it is a

policy decision as to whether Government is going to change the rate of

contributions and so on.

MR. CHAIRMAN: If we reflected the debt of the

Province as suggested by the Auditor General, what would our current account

deficit look like this year? Would there be any great effect on -

MR. CAREW: I could not answer that question

without some research, but you know, we would have to do a fair amount of

calculation to arrive at that figure, and I would hesitate to give you a figure

off the top of my head because -

MR. CHAIRMAN: But would there be a severe increase

in our deficit?

MR. CAREW: I think there would certainly be an

increase in the accumulative deficit over the years -

AN HON. MEMBER: There is a timing thing.

MR. CAREW: Yes, it is the timing that makes me a

little bit hesitant. You know, how much would you charge, for instance, to the

past fiscal year when you recognize the fact that there is one fund likely to go

into a deficit position in a couple years time; I think the teachers and the

uniformed services, possibly the MHAs, may be a little bit shaky now that the

general service fund is in a relatively healthy condition; again, that is just

off the top of my head and looking at last year's figures.

There is no question that the recognition in the

accounts of the liability for pensions and if you go on full accrual basis,

until such time as the fund builds up you are going to have an increase in your

deficit or a decrease in your annual surplus as the case may be, because you are

going to have to make some charges in there to bring the fund up.

MR. CHAIRMAN: Why I asked that, and I undoubtedly

will play a

part in any change over because the final decision is undoubtedly a

political one. If any quick change to accrual would result in a severe change, a

negative change in your deficit position, the ideal of any government is to come

out at the end of the year with a balanced budget or a surplus or whatever.

Certainly a balanced budget, because of the financial

state of the Province, the last couple of years we have seen severe reductions

in staff and in programmes and in whatever, perhaps without a choice, to address

the deficit.

If, because of a change in our method of accounting,

our deficit or paper deficit is going to be looked upon, or our current account

as reflected in the current account statement would be reflected negatively more

so, an increase or a dramatic increase, then undoubtedly Government would have

to take even harsher measures to try to control that current account deficit. So

undoubtedly, that would be a major factor in deciding how you are going to

reflect the accounts of the Province, because, what I am saying is, if tomorrow

you could decide yes, let us go to the accrual method, and then we realize that

by doing so, it is going to add an extra $100 million to our current account

deficit -

AN HON. MEMBER: On paper.

MR. CHAIRMAN: On paper, yes. Well, it is there

anyway. It does not matter, as we say, but when the budget comes down - well,

the budget this past year showed a $120 million deficit, whatever.

MR. RAMSAY: I see. I hesitate to question the

Chair, but you are implying that that would then we used as an excuse to make

further cuts.

MR. CHAIRMAN: No, no, not really. I am not trying

to play games with it, I am just trying to be realistic about the whole thing as

you would look upon it from a government perspective, you know, small `g' type

of thing. As we realize, there is a $120 million deficit this year and we hear

people saying, `Oh, you know, what do you expect because of Sprung and so on.'

The effect of Sprung is not reflected at all anywhere in that $120 deficit as

the amount of money that was written off because of Sprung, because of the way

the accounts were handled. But if these things did happen and if, as I say, with

the new accrual method we had to bring in a budget that showed a deficit of $220

million -

MR. RAMSAY: They would not look (inaudible).

MR. CHAIRMAN: Exactly. No government would want to

do the like of that, so what do you do? You have to try to address it in some

way to cut that deficit. We saw the effect on everyone of having to address the

present deficit, because of just changing our methods. People only see what is

there in black and white. They do not know anything about the notes or anything

else, generally speaking.

MR. RAMSAY: I think what you are saying, though,

is -

MR. CHAIRMAN: What I am saying is, what effect

would it have on any government, forgetting who is in power. What would the

government in power have to do to show the people, when a budget is brought

down, that, look we have a balanced budget or a surplus? Because right now

people generally, when we talk about budgets and deficits, 95 per cent of them

or maybe more, have no idea of the real financial state of the Province.

Probably I should add, they could not care less anyway. The point is, what they

see and what they hear is what comes down budget time.

MR. RAMSAY: So, you are looking at perception?

MR. CHAIRMAN: Exactly, moreso than reality. Of

course, it is perception upon which you win elections and politicians make

points.

MR. RAMSAY: Then you look at the real things in

order to correct that perception.

MR. CHAIRMAN: So,

whereas the final decision of

going to one method or another is a political one, I think the timing of it and

the effect upon current account standings would be a major decision on how fast

you switch methods, because of the effect it could have, unless it is not going

to have an effect. It seems, perhaps, if our true debt is reflected there would

be.

MR. RAMSAY: Just a comment: In my mind, as was

mentioned when I asked Mr. Carew about the total debt, and basically it is all

in there, it would only have an effect on the bottom line figure that it shows

at a given point in time, which, as you say, any person now can take the five

point two and add two points, whatever, and all of these things, and the only

one little figure that would become a political football, one way or the other,

would be the current account deficit for a given year. If you went the way

Ontario did, where they added their current and capital together -

whereas here

we just talked about a $120 million current account deficit, up there they went

to $9.6 billion based on capital and current combined. So, they bear the brunt,

I suppose, of combining the two. If we combine our two we are up to $600

million, I think it is.

MR. HEWLETT: What if you added in liabilities on

top of that?

MR. RAMSAY: Well, there you go, yes.

MR. CHAIRMAN: You are into a $1 billion deficit a

year for Newfoundland.

Any comment on that.

MR. HART: I guess, from our perspective, I

understand how the process works and that sort of thing, but I believe that we

can make much better informed judgements and decisions if we have everything

reflected as it should be. I think this paper figure versus the way it is

presently done may cause you to make one decision rather than if all the facts

were laid out, if you reflect the actual pension costs and the actual interest

costs. At some point in time you are going to have to deal with it, whether it

is this year or next year or two or three years down the road sort of thing. It

enables you to make a more informed judgement right up front, by having all of

the facts laid out to look at and then make whatever decision you feel is

appropriate at that time. I certainly cannot agree with the concept of fooling

yourself, I suppose, by looking at one set of figures and forgetting about these

other things that are over here. When you go out and borrow money to pay for the

Province's financial position, certainly they become a factor then. You are

going to have to consider the investments that were written off, that will have

to be taken into account in the total overall borrowing. So really to me it

would be much more sensible to be dealing with a complete picture as far as you

can within one account.

MR. RAMSAY: Mr. Chairman, I have a question for

Mr. Hart. You talk about knowing how the process works. When budgetary decisions

are being made in given departments, I know they reflect on what they feel their

given budget will be and then I guess Government itself has to decide, based on

all of these synopses that are put forward, what decisions should be made or

even by directive prior to that saying that is what we think you should do. So

you, Mr. Hart, think that the decision process may end up being flawed by virtue

of the method by which current accounting practices dictate that we keep our

books.

MR. HART: Well I think it would be a better

process if the accrual basis of accounting were used. Not just the accrual

basis, but that is one study. I am speaking of the accounting practice of not

reflecting write off of investments, for example. That has nothing to do with

cash or accrual that is just an accounting policy. If investments were charged

to current account expenditure as they were written off, then you would have a

better picture of the overall position, and if interest earnings on the sinking

fund were reflected maybe one would offset the other, but certainly at least you

would know, you would have the whole picture, you would not be operating in

isolation of these other factors that are affecting the fiscal position, but are

not reflected in the document that you are looking at. This would never happen

in private concerns out there somewhere if a board of directors were sitting

there looking at a set of financial statements trying to make some decisions

about how much dividends are going to be paid next year and that sort of thing.

They would never operate, I do not think, on a piece meal set of figures, they

would have -

MR. RAMSAY: One figure (inaudible).

MR. HART: - all the information relating to the

fiscal position. Now certainly if they had a major write-off of an investment,

that would certainly take some importance in their decision as to whether or not

they were going to pay dividends for the current year or if they were going to

buy new plant for the year and that sort of thing. If you forget about that loss

on foreign exchange, for example, that may have occurred on raising an issue, if

you do not reflect that, you are fooling yourself, in my opinion, by not taking

into account all factors.

MR. RAMSAY: And that may be not by design, but

(inaudible).

MR. HART: Not by design, but when you sit down and

look at your statement of revenue and expenditure, to me an informed reader

would say this is it, this is what we are dealing with. We have this surplus or

this deficit which we have to work with,

whereas if you take into account the

foreign exchange losses and the write off of investments and sinking fund

earnings and that sort of thing, well maybe it will affect the decision.

MR. RAMSAY: What would the true figure have been

for last year? Has that been calculated? You cannot, I guess, because you have

never been factoring in those, so if you do it in one incident it just totally

fools it up.

MR. HART: There are so many things that come into

play that I would not even hazard to guess that.

MR. GOVER: I think that is an important point that

Mr. Ramsay raised and Mr. Hart, that the financial statements, as they are

presently put forward could lead someone to an incorrect understanding of the

problem. And I think that is one of the reasons that there is almost a $2

billion problem in the four pension plans.

AN HON. MEMBER: (Inaudible).

MR. GOVER: That is just one example, a $2 billion

problem in unfunded liabilities because when you look at a cash basis you are

looking at what you are doing today, you are not looking at what your

liabilities are going to be tomorrow. And if I am looking at managing my affairs

on my outlays today and ignoring the fact that in the teachers plan, say there

is a $1.1 billion unfunded liability, what that means is that when the plan runs

out of money, it might be ten years from now, that either teachers are not going

to get their pensions to the extent they thought they were going to get them or

the Province is going to have to generate $1.1 billion out of its current

revenues, which means significant programme cuts in other areas.

So, by looking at the short-term or ignoring the

long-term implications of the decisions we are making today, and politicians, I

mean, being one of them, I suppose we have a failing in that we tend to look at

the short-term and deal with the immediate problems because we might not be in

office ten or fifteen years down the road when the problem is actually going to

come up. So, if we went to accrual, politicians would be more compelled to deal

with these problems today rather than put them off to the Government that

follows them, be it of the same party or not. That is what accrual accounting

would do better than cash, would that not be correct?

MR. HART: Yes, I believe, that plus a change in

some of the other accounting policies.

MR. RAMSAY: Some do not necessarily tie into the

accrual accounting.

MR. HART: Not necessarily, like the investment one

that we talked about that has nothing to do with an accrual basis, it is just a

way of reflecting.

MR. CHAIRMAN: Mr. Hewlett.

MR. HEWLETT: Yes, just one point that came up

mentioning Newfoundland Enviroponics. Your average, say listener to an open line

show might call in and make an expression of opinion with regard to the current

budget difficulties and say: well part of the problem that Dr. Kitchen had to

wrestle with this year is that we had to pay $20-odd million or whatever for

that particular project. But in terms of the current account budget, which is

generally what the person on the street hears about, reads about, talks about,

that particular $20 million expenditure is not in the current account estimates,

is it? Does it only show in a write-off of bad debts or something in another

section of the Budget?

MR. HART: It would affect it in the sense that the

borrowings that the Province has to make would certainly have to be taken into

consideration -

MR. HEWLETT: That would be rolled into the

borrowings -

MR. HART: - and therefore that would have an

impact on the overall financing and cost.

MR. HEWLETT: Where do we pay for the borrowings?

Do we take money out of current account to pay on the borrowings as such?

MR. HART: The interest expense on borrowings is

reflected through the current account, and I guess that is why I was advocating

that if you are reflecting the interest expense on money that you borrow, well

then it would be a fairly logical process that if you take some of that money

and invest it and earn interest on it to repay the borrowings, well then the

interest earnings should appropriately be shown as a revenue of the Province.

MR. CAREW: Mr. Chairman, if I might interject. On

that question which is being raised on not bringing gains and losses and so on

into current account on the operations of the sinking fund and so on, we are

governed there by the Budget. If Government and the House, presumably, because

the House approves the Budget, decides this is a non-budgetary item and shown as

non-budgetary, we have to show it that way in the public accounts. We cannot

deviate from what is in the Budget. From an accounting standpoint we would

probably agree with the Auditor General that it should be shown there, but it is

not because of any disagreement on that. It is simple that we are governed by

the Budget because when accounting principles conflict with legal principles or

legal requirements obviously the legal requirements take precedence. So, here

again you have to have this amendment to The Financial Administration Act to

correct a lot of these things before you even consider going to accrual.

MR. CHAIRMAN: Number one, we have a lot of

players. We have yourselves and, of course, the Auditor General, who is the

watchdog and his comments are only based upon proper accounting principles as

perceived by him. Yourselves, who because of the position you are in do not

necessarily disagree with the proper accounting positions. Then you have

Treasury Board, who basically direct, I presume, the principles you use, or

approve them for any major departures from them; and, of course, Government or

the House actually being the overall maker of laws and a lot of it probably

comes back to your comment on - it is time for a new Act - which is being worked

on, I understand. As times change, procedures change, and requirements change,

laws have to change to keep up with them. The only thing is, I guess, in our

jurisdiction as well as in many others everything else seems to change a lot

quicker than the laws and by the time you get the law changed a number of other

things have already changed ahead of it and away you go again.

It is after twelve and some of you probably have other

things on. I am not sure whether there is anything else pressing.

Mr. Ramsay, do you have -

MR. RAMSAY: I just have one - if it is too long,

you can cut me off - about the pension liability versus service costs, and that

has been discussed here already. The liability amount on pensions is, I would

say, $2.3 billion as an amount. Am I to understand - and it took me a while to

get my head around it - that that is actually the cash amount missing from

pensions, or does that amount reflect the actual cost of future liabilities on

pensions?

MR. CAREW: No, what we are talking about really, I

think, is the unfunded liability which is not recorded. It is the estimated cost

of meeting future pension obligations.

MR. RAMSAY: Okay. So, it is not an amount missing

from the coffers as far as contributions go, which is usually, I think, some

$200 to $300 million on some pension funds. You know, it is a smaller amount

missing, but the actual liability is much higher because of obligations

incurred.

MR. CAREW: Yes, it is a reflection of the fact

that for years various governments in succession, prior to 1967, took nothing

from the employees, but from 1967 onward they deducted from the salaries of the

public servants and so on. Up until 1980 these monies were just junked into the

general revenue, and not until 1980 did we start seriously - when I say we, I

mean the Province as a whole - putting money into the pension fund to cover some

of this. We have not, obviously, put enough in to cover the long-term

obligations.

MR. RAMSAY: Yes. Mr. Hart, this is where the

confusion came and why I asked this question, because you mentioned about the

actual cost, say in a given year, of future pension obligations not being taken

note of. I guess, in turn, that figure of total pension liability would be

adjusted in a note. Each year, I guess, as wages increase and therefore also the

amount of deductions for pensions and fees or whatever, increases, is that

another matter that you speak of?

MR. HART: They are two separate issues really. The

$2.3 billion is a calculation done by actuarial people as to the amount of

liability that exists at a certain point in time for services already performed

by employees that will have to be paid at future periods. So, at that last date

of adjustment that was the liability that was there then, I would imagine. I

cannot remember the date that that last one was done, but it was probably a year

or so ago.

MR. HEWLETT: It is a wide and growing figure.

MR. HART: Yes. So it is not getting any smaller,

unless some of the money is being paid back into it.

Now, the second one I was talking about, which is a

separate issue, is the annual growth in that should be reflected basically as an

expenditure, because the annual growth in that would be a reflection of the cost

for that given year of the pension fund. So, if the pension fund goes from $2.3

billion to $3 billion well then $700 million would be basically the annual cost.

Now, obviously there would be other factors taken into consideration, but that

is generally how it would work. It is growing annually and that annual growth in

cost would be what, under PSAAC, is -

MR. HEWLETT: Do you find (inaudible)?

MR. HART: Well, you know, I use $700 million as an

example. It could be $2.3 up to $2.4, say, so $100 million maybe, or it could be

a lot less than that, I do not know. But whatever the rate of growth in that is

it should be reflected as a cost. If you were to book that liability, the

liability that you booked, the $2.3 would not be a current account expenditure,

because that would be resulting from past periods.

MR. RAMSAY: Contingent liability, I guess?

MR. HART: Not contingent, no. I mean, it is an

actual liability, but it would be set up as an adjustment to your opening

surplus or deficit position. It would not affect the current account. The

current account would only be what happened from the date that you implement it,

I presume. That is the way I would consider recording it, anyway, because a lot

of people might think that, if you pick up this $2.3 billion now that is just

going to blow the top right off the current account deficit. No, that would not

be the case. That is there, whether we like it or not. It would not be reflected

as part of next year's current account. If we decided today to book that debt we

would not then throw that in as part of the current account situation.

Once you have done that and once you have made the

decision from here on end we are going to reflect the actual cost of that, well

then whatever the growth in the liability was from the date you book it to

today, then that would be your cost which would be reflected in the accounts for

that given year, because each year there are new employees contributing to the

pension so that is driving the cost of it up -

MR. RAMSAY: And maybe, that only upon the time

that they become vested at ten year service.

MR. HART: Yes, and there was a $21 million payment

that went into the pension fund, possibly there could be other payments and that

would reduce that liability, so those things would not affect the cost, it would

only be the actual cost earned by service performed by employees.

MR. RAMSAY: That is fine.

MR. CHAIRMAN: Any further comments, Mr. Hart,

anything in summation?

MR. HART: I would just like to say that basically,

our office and the office of the Comptroller General have a good relationship

and a good understanding of the problem.

There is general belief I think, that the accrual

basis of accounting would offer a much more informed set of financial statements

and much more realistic, but there are problems in its implementation and there

are legislative changes that will have to take place and we are bringing it to

the forefront now I guess, largely because professional requirements dictate

that we do.

We cannot ignore the fact that these generally

accepted accounting principles are there and other jurisdictions have basically

- the bulk of other jurisdictions have implemented much more of the

recommendations than we have here, so we can see a problem coming down the road.

I would like to work together with the Comptroller General. The last thing we

would ever want to do is issue a qualification on the financial statements of

the Province. Whether it would have an impact or not, who knows?

Nobody likes to see it there, but unfortunately or

otherwise, we may be in a situation where we have to seriously consider that,

but I think we are working together and we have a good common understanding of

the problem and I am hopeful that we will see some major moves in that in this

current year coming up.

MR. CHAIRMAN: Mr. Carew?

MR. CAREW: Mr. Chairman, I really do not have much

to add to what Mr. Hart has said, we basically agree on the objectives. I think

perhaps there is a little more emphasis on timing from the Auditor General's

point of view on bringing in full accrual, but by and large our objectives are

identical. I realize his position and I am sure he realizes mine, that we are

hampered by two things: the legislative changes that have to be made, and here

again it is a matter of time and the resources available to actually carry it

out from within our department; once we solve these problems I do not think we

will have to wait too long for these things to come.

MR. CHAIRMAN: And hopefully, the committee that

has been set up can push along, and undoubtedly our own recommendations will be

along the line of trying to move things as quickly as possible, so in the end

everybody will be happy.

I think we have had a relatively good hearing.

Certainly everybody here has a better understanding of the problems faced in

trying to show the actual financial standings of the Province and the

complications involved. Hopefully some of it will get out and I thank the media

for being here, those who are here, and it will give people generally a chance

to understand more fully exactly where we are and why we are there.

Thank you both for coming. We are hoping tomorrow that

we will be able to deal with the student aid, we had them set for Thursday, we

thought this might take a couple of days but it was not as contentious as some

people thought it might be.

We will try to get the student aid people moved up to

tomorrow rather than break and come again Thursday, so we will have to let you

know this afternoon and we will let the press know also. I do not think it

should be a problem, but if there is we will let you know anyway.

So, once again thank you for coming and hopefully we

will not see you again. We say that because we have said to some of the groups

who have been here, in fact student aid I guess, is our first example, last

year, when we had people in, if they had not made any movement within the year

type of thing, we would bring them back for accountability.

Just before we go, I would ask the Members if they

would approve the minutes.

On motion, minutes adopted as circulated.

MR. CHAIRMAN: Thank you very much.