HUMA Committee Report

A vast majority of the witnesses who appeared before the Committee indicated that the government's proposal to strengthen the EI premium rate-setting process was a step in the right direction. However, many witnesses raised one or more concerns about this proposal and suggested ways to strengthen it. These are discussed below.

Many witnesses also indicated that the need for EI reform extends well beyond the proposal to strengthen the premium rate-setting process. In this context, employee representatives called for changes in program coverage and benefit eligibility, while employer representatives sought further reforms to EI financing and the program's capacity to address skills shortages. These matters have also been addressed in recent reports prepared by the Committee.¹⁵

The Board's Mandate and Powers

Some witnesses expressed concern about the scope of the Board's mandate and powers, which are clearly outlined in sections 4 and 5 of the proposed Canada Employment Insurance Financing Board Act. When the Minister of Human Resources and Social Development appeared before the Committee on April 29 and May 27, 2008, he assured the Committee that the Board has no EI policy-making authority and that the federal government retains exclusive responsibility for the design and delivery of the EI program.

In the Budget Implementation Act, we are proposing to establish the Canada Employment Insurance Financing Board, which will implement an improved EI premium rate-setting mechanism to ensure that EI revenues and expenditures break even over time. The board will also be managing a new bank account, separate from the government's general revenues, where any excess EI premiums from a given year will be held and invested until they are used to reduce premium rates in subsequent years. The
government will provide $2 billion to establish a real cash reserve, which the board will maintain. Of course the Government of Canada and the existing Employment Insurance Commission will continue to have full responsibility related to EI benefits and program delivery, including eligibility and benefit levels.¹⁶

The Honourable Monte Solberg,
Minister of Human Resources and Social Development

Subsection 5(2) of the proposed Canada Employment Insurance Financing Board Act states that the "Board shall not, directly or indirectly, carry on any business or activity or exercise any power that is inconsistent with the Board's objects, including any power in relation to benefits or other payments made under subsection 77(1) of the Employment Insurance Act or to the employment insurance program design or delivery ." Despite these seemingly clear limits on the Board's powers, some witnesses sought greater assurance that the Board would not undertake analysis or make recommendations with respect to EI policy or program delivery. Others were concerned that the potential influence of the Board might somehow affect adversely the level and type of financial support provided under the EI program in the event that the Board encountered difficulties achieving its premium rate-setting objectives. A small minority of witnesses indicated that the Board's mandate was too narrow.

[T]he mandate of this new board should be very narrow and confined solely to financing the program and managing the investment fund. . In our view, all of the basic design features of the program, such as who qualifies for what period, how the premium is divided between employers and workers, should be the role of the Minister of Human Resources and Social Development. I don't believe it's the intent of the government to change that, but we suggest a specific wording that I think is important to clarify it. So with this new board, there are questions of accountability to Parliament and about its function. I think it's extremely important to be very precise on what the mandate is.¹⁷

Mr. Andrew Jackson,
Canadian Labour Congress

As I said, in spite of the bill's pompous title, the Board will not provide funding. Its mandate will be very limited: it will not set premiums or manage the reserve. Ultimately, the government will be responsible for premium levels. .This bill has a number of perverse effects. The Board may not get directly or indirectly involved in the coverage provided by the scheme. The bill expressly provides that the Board may not address that question.¹⁸

M. Georges Campeau,
Mouvement autonome et solidaire des Sans-Emploi

One issue that came up in another committee, with respect to the composition and mandate of the board, was to what extent it would have the capability to kind of conduct independent analysis. In our view, the board should have the mandate, in fact, to not just look very narrowly at the rate-setting exercise, but I think to conduct analysis and offer advice to the government.¹⁹

Mr. David Stewart-Patterson,
Canadian Council of Chief Executives

While most members of the Committee believe that the proposed legislation outlining the Board's mandate and powers is clear, we understand that some groups and individuals would like to have greater assurance that the Board's mandate and powers are limited exclusively to setting the premium rate and managing the reserve. Moreover, we believe that an adequate EI policy-development capability already exists within Human Resources and Social Development Canada and the Canada Employment Insurance Commission. Hence, there is no strong rationale for assigning this task to the proposed Board. It is also important to mention that Parliament decides which policies are implemented.

In the event that the Board's mandate and powers are not further clarified in the proposed law, we suggest that, at the very least, this clarification be provided in a detailed description of the Board's mandate and powers in the annual report that the Board would be required to prepare pursuant to section 34 of the Canada Employment Insurance Financing Board Act.

Recommendation 1

The Committee recommends that the Canada Employment Insurance Financing Board Act be amended to explicitly state that the Board is not permitted to undertake analysis for or make recommendations to the federal government regarding Employment Insurance program policy, including benefits, and program delivery.

Board Representation

Several witnesses, mainly those representing employees, indicated that the proposed legislation does not require employee and employer interests to be equally represented on the board of directors of the proposed Board. In their view, this is a significant shortcoming in the Board's governance structure, as the EI program is funded exclusively by employees and their employers.

The board of directors must be independent, and there must be some parity, in other words, both employers and employees must be represented on it.²⁰

M. Michel Kelly-Gagnon,
Conseil du patronat du Québec

However, the bill does not mention that the board of directors must be representative in terms of premium payers. Is it necessary to point out that the program is funded exclusively by the premiums paid by employers and workers? They should certainly have a say in the management of the employment insurance account. Bill C-50 therefore needs to be amended to guarantee fair representation for those who pay premiums into the scheme in the governance structure. We are therefore asking that the board of directors be composed of a large enough, fixed and equal number of representatives of employer and union associations, and that they be chosen from lists supplied by their most representative respective associations.²¹

M. René Roy
Fédération des travailleurs et travailleuses du Québec

If we don't have the tools, if there are no representatives of employers and workers at the board of directors' table to determine needs, this presents a problem. In that sense, the fund is too imperfect for us to approve it as it stands.²²

M. Claude Faucher,
Centrale des syndicats démocratiques

So we'd like a stable board, if possible. We'd like a non-partisan board, with people with expertise, which I'd like to see a committee agree upon. Informally, it's been identified that the nomination committee will be the EI Commission, but I don't think it's formally stated in the act. I'd like to see it formally stated in the act because that would give employers and employees more say, rather than the political party in power.²³

Mr. Garth Whyte,
Canadian Federation of Independent Business

While the Canada Employment Insurance Financing Board Act is silent in terms of employee/employer representation on the board of directors, it should be noted that the proposed law requires that the board of directors be selected from a list compiled by a nominating committee. This nominating committee is composed of a chair (appointed by the Minister), the EI Commissioner representing workers and the EI Commissioner representing employers. Although the proposed legislation does not require members of the board of directors to have specific qualifications, it is important to note that the nominating committee must consider the desirability of having on the board of directors a sufficient number of directors with proven financial ability or relevant work experience to allow the Board to fulfill its mandate. Given that the board of directors would consist of seven directors, members of the Committee believe that this requirement can be fulfilled as well as ensure that program contributors are fairly represented.

Recommendation 2

The Committee recommends that the federal government amend the Canada Employment Insurance Financing Board Act to ensure that the board of directors of the Canada Employment Insurance Financing Board include two directors representing employees and two directors representing employers.

Board Independence

Officials from both Finance Canada and Human Resources and Social Development Canada assured the Committee that the proposed Canada Employment Insurance Financing Board would be independent and operate at arm's length from the federal government.

These changes are in keeping with the government's commitment to improving the management and governance of the EI account. As a small crown corporation working at arm's length from the government, the CEIFB will ensure independent decision-making regarding the setting of premium rates .²⁴

Mr. Louis Beauséjour,
Department of Human Resources and Social Development Canada

While members of the Committee generally agree that the proposed Board appears to be more at "arm's length" from the government than the Canada Employment Insurance Commission, some of us think that the Board's rate-setting process is, in some cases, less independent from the government than the current rate-setting process. This view was also expressed during our hearings, as the observation was made that the Board could be unduly influenced by the requirement that it use specific information from specific sources to estimate the premium rate for the following year.

I think the legislation reflects an extremely strong role by the Department of Finance moving forward, even over this new and so-called independent fund and commission. In terms of what this board does, the economic assumptions that they're allowed to take into account in setting the premium rate are those from the Department of Finance. They're not really allowed an independent role around judging the economic situation we're in.²⁵

Mr. Andrew Jackson,
Canadian Labour Congress

Canada's actuaries believe that the Chief Actuary and Board need to be free to choose and evaluate economic variables from various sources in determining suitable premium levels. In our opinion, these restrictions are completely at odds with accepted actuarial practice and do not support the promise of "independence" put forward by the Minister of Finance in the February 26^th Budget.²⁶

Canadian Institute of Actuaries

In addition to the continued requirement that the Board use the information provided by the Minister of Finance regarding the latest economic forecasts to estimate the premium rate in the following year, the proposed law would require the Board to use the forecast change provided by the Minister of Human Resources and Social Development in the
event that the Minister has announced changes on or before September 30 in a year, to payments made under paragraphs 77(1)(a), (b) or (c) of the Employment Insurance Act during the following year. We observe that the estimation of these costs is currently within purview of the Chief Actuary.

Perhaps the most constraining rate-setting provisions regarding the Board's independence pertains to the proposed subsections 66.1(2)(b) and 66.2(2)(b) of the Employment Insurance Act. Both of these subsections would permit the Governor in Council to make regulations specifying the information referred to in subsections 66.1(1) and 66.2(1) that would be binding on the Board in determining the premium rate for the following year. No such provision exists in the current rate-setting process.

Recommendation 3

The Committee recommends that the federal government amend the Employment Insurance Act to provide the Board with more flexibility in terms of the information that it may use to determine the premium rate. At the very least, the Board should have the same degree of flexibility regarding the information to be used as that afforded to the Chief Actuary under the current rate-setting process.

Administration Costs

According to the Public Accounts of Canada, Employment Insurance administration costs, for the fiscal year ended March 31, 2007, totalled $1.6 billion or 10.3% of total EI expenses. Given the cost of administering EI, it is not surprising that several witnesses questioned the need to add to these costs by creating a Crown corporation to perform the duties of what some felt could be provided within the Canada Employment Insurance Commission. The Committee was told by departmental officials that the costs of creating and operating the proposed Crown corporation are not known, but that these costs would probably be recovered by the reserve's return on investment.

The seven-member board was deemed appropriate in light of the very focused mandate of this particular board in relationship to some of the other boards you may be familiar with. It will be run by a board of directors, on a part-time basis, with the necessary skills and experience to carry out the organization's mandate. . If I may also add to this, the legislation provides that the board may invest the reserve until it is required to pay for benefits. So it's anticipated that the operating costs of the board would be more than covered by any investments they might generate against the reserve.²⁷

Ms. Sherry Harrison,
Department of Human Resources and Social Development Canada

Despite the assurance that the Board would be governed by a board of directors on a part-time basis, this requirement is not specifically outlined in the proposed Canada Employment Insurance Financing Board Act. In view of the significant administration costs that are already borne by EI, the Committee feels that the federal government must ensure that the operating costs of the Board are minimized to the greatest extent possible and do not overlap with those incurred by the Canada Employment Insurance Commission.

Recommendation 4

The Committee recommends that, if necessary, the federal government amend the Canada Employment Insurance Financing Board Act to ensure that the operating costs of the proposed Crown corporation and its governance structure are commensurate with its focused mandate.

The Reserve and Pro-cyclical Rate Setting

As noted above, the Board would be responsible for managing a reserve, an initial amount equal to two billion dollars and indexed annually beginning in 2009, on a compound basis, in accordance with regulations. In setting the premium rate for the following year, the Board would be required to establish a rate that, among other things, ensures that the fair market value of the reserve at the end of that year is equal to the indexed value of the initial reserve.

We were told by officials from Human Resources and Social Development Canada that the rationale for the size of this reserve was that it would adequately support relative premium rate stability (i.e., the premium rate set by the Board cannot be more or less than $0.15 per $100 dollars of insurable earnings in relation to the previous year's rate).²⁸

This $2 billion amount takes into account different economic scenarios and assessments undertaken in conjunction with the employment insurance Chief Actuary. It was estimated that a cash reserve of this level would be adequate to offset cash shortfalls under the new rate-setting model resulting from a mild recession, such as the one experienced
in 2001-2002.²⁹

Mr. Louis Beauséjour,
Department of Human Resources and Social Development Canada

Many witnesses expressed the opinion that the size of the proposed reserve was inadequate, especially if the Canadian economy were to experience a prolonged recession. Under such a scenario, it is reasonable to assume that the reserve would be depleted very quickly, forcing the Board to increase the premium rate by the maximum allowed until the value of the reserve is restored and any advances to the Employment Insurance Account are repaid. In other words, under the proposed premium rate-setting process, the premium rate (which is part of the cost of labour) would be forced to rise at the same time as employers would be laying off workers and unemployment would be rising. Avoiding this adverse result was purportedly the reason for introducing the "stable" rate-setting process in 1996 under the Employment Insurance Act.

Witnesses' suggestions regarding the size of the proposed reserve ranged from a low of one-fifth of the cost of benefits to a high of $15 billion, the upper range of the estimated reserve required to achieve premium rate stability under the original premium rate-setting process of the Employment Insurance Act. However, the Committee was reminded that labour market conditions today are vastly different from those of the latter 1990s when it was determined that a $10 to $15 billion reserve was sufficient to cover program costs over a 15-year period as well as facilitate premium rate stability (at the time, this implied an average premium rate of between $1.90 and $2.10 per $100 of insurable earnings).³⁰ Moreover, we note that the EI tax base has also increased in the interim.

Let's assume that a recession hits Canada and unemployment levels rise to 8% . The payment to out-of-work Canadians increases by approximately $3 billion. So the $2 billion reserve of the board is depleted and the EI account has to borrow $1 billion from the government . In this situation we might have to raise the premiums above the legislated limit of 0.15%. Consideration of applying the 0.15% would fall to ministers. It would not be a very easy decision, because if you applied the 0.15% ceiling you would run a deficit and the deficit would accumulate. The impact on Canadian businesses, which pay nearly 60% of the cost of employment insurance, would be huge, because at exactly the same time, profits would be lower and limited. Cash flows would also be lower. Workers would have to pay 40% of the cost when they were already at risk of losing their jobs, and businesses would need to find money somewhere. . We believe this is significantly pro-cyclical, and as actuaries we are not comfortable with a pro-cyclical mechanism and the one-year-going-forward basis.³¹

Mr. Bruno Gagnon,
Canadian Institute of Actuaries

So on the one hand, while I absolutely agree with all of the witnesses that we have to get a reserve that's reasonable to get us through the recession, to get us over a situation in which there's great demand on the fund, I'm also concerned about having a reserve that's too high and is too tempting, quite frankly, to legislators who want to dump programs and other things off the consolidated revenue fund into a fund that's shouldered only by employers and employees.³²

Mr. Michael Atkinson,
Canadian Construction Association

As we've stated in our presentation, we would hope for at least a 50% increase - so $3 billion instead of $2 billion. But we also believe that there's an issue of an equilibrium between what's desirable - and I think in his presentation Mr. Gagnon said that up to $15 billion would be desirable - and the issue of public finance. I think you, as parliamentarians, will have to decide on an equilibrium between what's desirable and what's doable in terms of public finance.³³

M. Michel Kelly-Gagnon,
Conseil du patronat du Québec

On the notion of adding a bit more into the account in the transitional years - if there's a consensus that $2 billion, despite what the actuaries say, is a bit dicey and we need a little more - yes, whether we're talking about $1.5 billion or whatever is available out of a year - end surplus for a couple of years, I can see that kind of repatriation, if you want, as a transitional measure.³⁴

Mr. David Stewart-Patterson,
Canadian Council of Chief Executives

[E]nsure no rate increases for the next five years while you try this project? Keep enough there. Two billion dollars is just not enough of a security cushion. . put more in there for the next five years.³⁵

Mr. Dannie Hanson,
As an Individual

In addition to increasing the size of the proposed reserve, the Committee was advised that a stable rate-setting process necessarily entails establishing a premium rate over a longer period of time than the proposed one year. Suggestions ranged from a period of between five and seven years to as long as a business cycle.

The one year look forward in developing premium rates is too short and does not foster rate stability; a longer time horizon needs to be put in place. We believe that five to seven years, or approximately a business cycle, would be appropriate.³⁶

Mr. Bruno Gagnon,
Canadian Institute of Actuaries

[W]e've said the premiums should be set at a level designed to break even over the course of a business cycle .³⁷

Mr. David Stewart-Patterson,
Canadian Council of Chief Executives

Recommendation 5

The Committee recommends that the federal government enhance premium rate stability under its rate-setting proposal by increasing the size of the proposed reserve and amending the Employment Insurance Act to establish a forward-looking, rate-setting reference period of five years.

Advances to the Employment Insurance Account

As indicated earlier in our report, if amounts credited to the Employment Insurance Account after December 31, 2008 and the amount of the Board's reserve are unable to cover the cost of authorized amounts charged to the Account, the Minister of Finance may, at the request of the Minister, authorize an advance to the Account from the Consolidated Revenue Fund to cover the shortfall in revenue. This is significantly different from the current wording of subsection 80(1) of the Employment Insurance Act which states that "if the amount standing to the credit of the Employment Insurance Account is not sufficient for the payment of amounts authorized to be charged to the Account, the Minister of Finance, when requested by the Commission, may authorize the advance to the Account from the Consolidated Revenue Fund of an amount sufficient to make the payment."³⁸

Despite the statutory nature of EI benefits and the fact that subsection 80(1) of the Employment Insurance Act currently uses discretionary instead of mandatory wording, several witnesses expressed the view that the federal government's commitment to "backstop" the EI program in the event of a shortfall in revenue should be reflected in subsection 80(1) of the Employment Insurance Act by replacing the word "may" with "shall".

If you get into a situation like that, where there is a recession and there's a shortfall here.... I don't know who came up with the $2 billion, but the $54 billion that was saved up in this plan was put there by employers and contractors or owners. I really feel the government should backstop that. If there's a shortfall, I don't agree that the premiums should go up at all. I think the government should step in and give back some of that money .³⁹

Cliff Murphy,
Cape Breton Island Building and Construction Trades Council

The key point I would make is that the EI surplus was built up, in significant part, on the justification that it was there to backstop the EI account, that it was there to cover deficits if we entered a prolonged recession. We know that $2 billion is not enough to accomplish that purpose. I believe this legislation should be amended to explicitly state that the EI account remains available to the Government of Canada to backstop any deficits in the event of a recession. I believe that would actually reflect what Minister Flaherty has said to us - that if indeed expenditures were to exceed revenues over a year, the Government of Canada would make up the difference. I think that should be explicitly stated in the legislation, so that the accumulated EI account isn't just hanging there in limbo.⁴⁰

Mr. Andrew Jackson,
Canadian Labour Congress

I read proposed section 80: I read some of the others. It doesn't say that they're going to maintain some of those things that we think are important. It doesn't say that the Government of Canada is going to backstop this stuff. . [I]n terms of transparency, I don't read this bill as a transparency bill. It's opaque to me.⁴¹

Mr. Robert Blakely,
Building and Construction Trades Department, AFL-CIO, Canadian Office

[W]e are concerned that employers and employees must bear the risk of paying for economic downturns after already building up a $54 billion surplus. It is shameful and unfair. At the very least, the federal government should cover off any future shortfall in the EI account, if the need arises.⁴²

Mr. Garth Whyte,
Canadian Federation of Independent Business

We propose that these [advances under section 80 of the Employment Insurance Act] would not be reimbursable advances but rather "non-reimbursable payments" drawn from the accumulated surplus.⁴³

M. Pierre Céré,
Conseil national des chômeurs et chômeuses

Many witnesses also indicated that if advances to the Employment Insurance Account are necessary to cover program costs, contributors to EI should not have to repay these advances, given the fact that "the amount standing to the credit" of the Employment Insurance Account for the year ended March 31, 2007 was $54.1 billion.⁴⁴

We acknowledge that a report prepared by this Committee in the 38^th Parliament recognized that there are large fiscal implications associated with repatriating this notional cumulative surplus in the Employment Insurance Account. Moreover, EI premium payers and taxpayers alike have already benefited from spending related to year-end surpluses in the Employment Insurance Account "via spending on other priorities such as health care, increased assistance for higher education, tax relief and debt reduction, to name just a few."⁴⁵ We also note that this issue is before the Supreme Court of Canada and many members of the Committee are reluctant to consider this issue in this report prior to a decision being rendered in this case.⁴⁶

Recommendation 6

The Committee recommends that the federal government amend the Employment Insurance Act by substituting the word "shall" for the word "may" in subsection 80(1) of the Act.