PACP Committee Report

A sound and effective system for managing spending is central to the government’s ability to carry out its fiscal responsibilities, fund its programs, control spending, and report financial and performance information to Parliament and the public.  An Expenditure Management System that works well promotes efficient, responsive, and accountable government.  Without a good system, nothing that individual departments and agencies can do will result in sound overall management of government spending. 

In the chapters considered by the Public Accounts Committee for this report, the Auditor General wanted to assess whether the government’s current Expenditure Management System is appropriately designed and implemented to support decisions made about the allocation and reallocation of resources and to provide effective oversight of expenditures.  The Auditor General also studied how the Expenditure Management System works in departments.   Departments play an essential role in the Expenditure Management System because they are responsible for managing the resources allocated to them and for achieving the results expected of their programs.

The Committee agreed with the Auditor General’s concern with this issue and held two meetings, 26 February 2007 and 28 February 2007, to consider the audits of the Expenditure Management System.  The Committee met on both days with the Auditor General of Canada and other officials from her office: Douglas Timmins, Assistant Auditor General; Tom Wileman, Principal; Richard Domingue, Director.  The Treasury Board Secretariat was represented by Wayne Wouters, Secretary of the Treasury Board, and David Moloney, Senior Assistant Secretary, Expenditure Management Sector.

The Expenditure Management System is at the heart of government operations.  The main components of the System are the processes and procedures by which the central agencies of government support Cabinet in allocating and managing government spending.  These processes and procedures are designed to help align resources with priorities, oversee spending, and establish the policies that departments will follow to manage and deliver their programs.  Expenditure management in departments is tied to the annual budget cycle and reacts to changing priorities throughout the year.

The Expenditure Management System is made up of two elements.  One deals with funding for existing programs and takes place through a process known as the Annual Reference Level Update, or ARLU.  In this process, the Treasury Board Secretariat and departments examine the amounts approved by the Treasury Board for the previous fiscal year and establish the amount of funding for the next fiscal year and the following two planning years.  As the Auditor General noted, this is a mechanical exercise that does not take program performance into account.   In addition, the Treasury Board Secretariat does not exercise any substantive challenge to what is contained in the Annual Reference Level Update, because all of the items contained in the ARLU already obtained Treasury Board approval at some point.

The second element of the Expenditure Management System involves a process for approving new spending.  A new spending proposal is first approved by Cabinet through the use of Memoranda to Cabinet.  A Memorandum to Cabinet presents the new program’s proposal, the reasons for it, its possible impacts, and the financial implications. The memorandum does not need to identify a source of funds: at this point, the program is only seeking policy approval or, at a minimum, approval in principle by one of the Cabinet committees.  Following ratification by Cabinet, spending proposals are added to an inventory of possible initiatives for future budgets.   The Minister of Finance and the Prime Minister decide which proposals will be included in the Budget, and the decision depends on available funding and priorities not yet addressed.

Once a program has been included in the Budget, the sponsoring minister makes a separate submission to the Treasury Board to request that funds be allocated to the department for the specific program.  The Treasury Board submission explains how the department will carry out the proposed initiative and with what resources each year, what the department expects the initiative to achieve, and how it will monitor and assess results.  The Treasury Board may reject a submission (an extremely rare occurrence), approve it outright, or approve it with conditions.  If the funding approved relates to an ongoing new initiative or a permanent expansion of an existing program, the funding becomes part of the relevant department’s reference levels and gets rolled into the Annual Reference Level Update exercise discussed above.

One of the main problems affecting the Expenditure Management System is that these two processes, the Annual Reference Level Update that approves old spending and the new spending proposal process, operate separately from one another.  That is, there is no process for examining what funds are already being spent on similar programs that have their funding automatically approved each year through the ARLU exercise.  Nor is there currently any way to assess the effectiveness of programs that automatically receive funding through the ARLU exercise:  the government does not evaluate every program for effectiveness on an ongoing basis.

The current Expenditure Management System has been in place since the mid-1990s and was designed to operate when the government was in deficit.  In Budget 2006, the Government of Canada announced that it was going to examine the Expenditure Management System with the intent of producing an improved system.  The Budget stated that the aim of the improved Expenditure Management System is to respect the following principles:

• “Government programs should focus on results and value for money;
• Government programs must be consistent with federal responsibilities; and
• Programs that no longer serve the purpose for which they were created should be eliminated.” ^[1]

Budget 2007 highlights an improved Expenditure Management System; however, there is little detail given in the Budget Plan.

The Committee would like to see more details about the improved Expenditure Management System and how it will lead to a more effective System.  Thus, the Committee recommends that

RECOMMENDATION 1

The Treasury Board Secretariat provide the Public Accounts Committee with a detailed plan of the Expenditure Management System when it is available.

On 23 November 2006, the Minister of Finance presented his Economic and Fiscal Update.  In the Update, he indicated that the President of the Treasury Board would soon outline the Government’s new Expenditure Management System.  Minister Jim Flaherty stated that the new Expenditure Management System “will ensure that federal spending delivers results, is guided by clearly defined objectives and goes towards the highest priorities of Canadians.”^[2]  Budget 2007 stated that the new Expenditure Management System will “fundamentally change the way government operates.”

According to officials from the Treasury Board Secretariat, implementation of the new Expenditure Management System depends on when the initiative receives Cabinet approval.  Wayne Wouters stated that the Secretariat “will have an implementation plan once the government decides to proceed and agrees on the individual details.”^[3]  Mr. Wouters also stated that he would be pleased to make this implementation plan available to the Committee once it is finalised.  The Committee looks forward to receiving this implementation plan and recommends that

RECOMMENDATION 2

The Treasury Board Secretariat provide to the Public Accounts Committee a detailed implementation plan of the new Expenditure Management System when it receives Cabinet approval; and that the Secretariat provide the Committee a status report on the implementation of the new Expenditure Management System by the end of the next budget cycle, 31 March 2009.

The Committee strongly endorses all of the recommendations made by the Auditor General.  The Treasury Board Secretariat responded to the audits by saying that they are “in general agreement” with the recommendations made by the Auditor General.  The Committee would like assurance that the Secretariat plans on adhering to the recommendations made in the audits, and as such recommends that

RECOMMENDATION 3

The Treasury Board Secretariat provide the Public Accounts Committee with an action plan detailing how it will implement all of the recommendations made in Chapter 1, Expenditure Management System at the Government Centre and Chapter 2, Expenditure Management System in Departments from the November 2006 Auditor General’s report by 30 June 2008.

The Auditor General reported on the relationship between the three central agencies – the Treasury Board Secretariat, the Department of Finance, and the Privy Council Office – and the role these three agencies play in ensuring an effective Expenditure Management System.  The Treasury Board Secretariat plays a key role in managing government expenditures after Cabinet approves the allocation of funds.  The other two agencies are involved in setting policy and spending priorities. The Department of Finance is mainly responsible for ensuring the integrity of Canada’s finances and the Privy Council Office is responsible for ensuring that the allocation of resources is in line with the government’s priorities.

The Auditor General noted that there are weaknesses at the Memorandum to Cabinet and Treasury Board submission stages and that these weaknesses limit the central agencies’ ability to review the merits of spending proposals and to determine opportunities for trade-offs between new and existing programs.  However, when the Auditor recommended that the central agencies clarify their roles in the Expenditure Management System, the government’s response was that “the central agencies agree that clarity of roles and responsibilities is essential.”^[4]  The Committee would like to see more explanation about how the roles and responsibilities of central agencies will be clarified to ensure that the Expenditure Management System functions as effectively as possible.  Therefore, the Committee recommends that

RECOMMENDATION 4

The Treasury Board Secretariat work with the Privy Council Office and the Department of Finance to clarify their respective roles in the Expenditure Management System; and provide the Public Accounts Committee with information on these clarified roles and explain how these clarified roles will improve the effectiveness of the Expenditure Management System by 30 June 2008.

The Auditor General was unable to audit certain aspects of government operations managed by the Treasury Board Secretariat because her office was denied access to the information it needed.  The Office of the Auditor General attempted to determine whether the Treasury Board Secretariat had adequately fulfilled its challenge and oversight responsibilities related to government spending.  In the course of the audit, the Office of the Auditor General was denied access to the analysis conducted by the Secretariat on the basis that they were Cabinet confidences.  This has since been clarified by a new Order in Council. 

The new Order in Council states that the Auditor General can have access to certain information that constitutes Cabinet confidences that came into existence on or after 6 February 2006, the day the current government came into office.  Specifically, the Auditor General now has access to the following information as it relates to public expenditures:

1. a submission to the Governor in Council,
2. a submission as presented to the Treasury Board and any explanations, analyses of problems or policy options contained in or prepared by officials in relation to the submission, but not information revealing views, opinions, advice or recommendations presented to a Treasury Board Minister or to the Treasury Board,
3. any explanations, analyses of problems or policy options contained in a record presented to Council, as defined in subsection 39(3) of the Canada Evidence Act (“Council”), for consideration by Council in making decisions but not information revealing a recommendation or proposal presented to Council by a Minister of the Crown,
4. a final decision of Council, and
5. a decision of the Treasury Board.^[5]

The Committee is pleased to see that the situation has been clarified, and that the Office of the Auditor General can now access the information it needs to complete audits.  To guarantee that the Auditor General continues to have this access, the Committee recommends that

RECOMMENDATION 5

The Treasury Board Secretariat work with new governments to ensure that the Office of the Auditor General has access to the documents it needs to fully conduct its audits as is stated in the Auditor General Act.

Now that a new Order in Council is in place that clarifies the Auditor General’s access to certain Cabinet confidences, the Auditor General may wish to review how the Treasury Board Secretariat fulfills its challenge and oversight responsibilities in a follow-up audit given that it has better access to the necessary documents.  The Committee would look forward to an update on this issue.

One of the stated goals of the new Expenditure Management System is to ensure that every dollar spent is well-spent.  However, without an effective evaluation function, the task of making sure every dollar is spent wisely is nearly impossible.  In order to perform this type of expenditure oversight, the Treasury Board Secretariat must have access to timely, comprehensive, and reliable information on program costs and performance.  The Auditor General found that the information currently available to the Secretariat and the other central agencies is weak.  As Wayne Wouters stated, the evaluation function “is not at a level that is required in order to do the appropriate assessment of programs on an annual basis.” ^[6]

The weakness of the evaluation function is seen in the fact that the Annual Reference Level Update (ARLU) process, which is the mechanism through which departments have their ongoing spending approved by Parliament, is not designed to consider the performance of the programs that are seeking ongoing funding approvals.  Though reviews and evaluations do take place on occasion outside the ARLU process, performance information is not integrated with this technical annual process used to renew spending for ongoing programs.  Each year, the Treasury Board Secretariat recommends that the Treasury Board approve ongoing funding for programs, without assessing whether they remain effective and relevant.

Despite the fact that monitoring existing programs for their cost and effectiveness should be a standard requirement in government, the present Expenditure Management System does not require that departments and agencies submit non-financial performance information to show that they have used their funding effectively.  As the Auditor General points out, this gap in information exists even though the Treasury Board Secretariat is currently modernizing the program evaluation policy and uses a considerable number of resources and effort to help departments and agencies evaluate the performance of their activities.

The Committee was pleased to hear that the Treasury Board Secretariat plans to improve the evaluation function.   According to Mr. Wouters, the Secretariat would like to be in a position to evaluate every direct program ’s spending over a five-year period.  This lofty goal would necessitate a dramatic increase in the current evaluation capacity:  Mr. Wouters suggested to the Committee that the goal of evaluating every direct program’s spending would “probably mean roughly a doubling of the number of evaluators… which would be around 200 additional evaluators.”^[7]   The Committee supports this move to hire more evaluators in order to improve the information used in the Expenditure Management System.  However, as the Secretariat has not provided any details on how these additional evaluators will be hired, the Committee recommends that

RECOMMENDATION 6

The Treasury Board Secretariat provide the Public Accounts Committee with an action plan to hire and train the evaluators necessary to ensure the new Expenditure Management System functions as planned by 30 June 2008; and

The Treasury Board Secretariat reinforce the importance of evaluation by adding program evaluation as a key requirement in the Expenditure Management System.

Spending initiatives can involve large or small amounts of funds, an ongoing or a temporary timeframe for funding, and a changing funding profile over the years of the program. Determining the amount, the timeframe, and the funding profile is fundamental to designing an initiative or a program; all three factors are linked to the nature of the program objectives and how the program will meet its objectives.

Alignment is the extent to which the funding amount, timeframe and profile aligns with what the program requires for its implementation, delivery, and achievement of objectives.  The Auditor General pointed out that the lack of alignment for new programs causes departments a myriad of problems:  from seeking Supplementary Estimates for the same program on a reoccurring basis to spending funds before they receive parliamentary approval. 

A major cause of the alignment problems cited by departments is the inflexibility of the Expenditure Management System.  Specifically, departments note that the funding profiles for new programs approved in the Memorandum to Cabinet phase were not aligned with planned or actual spending.  Funding profiles change constantly because a program’s requirements can change constantly, often due to circumstances beyond the department’s control.  For example, if a program faced delays related to third-party activities, the approval process could take longer than expected and more of the funding would need to be shifted to later years.  The inflexibility of the Expenditure Management System means that departments have difficulty changing a funding profile that was set out in a Memorandum to Cabinet to match the new realities facing the program.

The inflexibility of the Expenditure Management System is seen in the fact that the funding profile of a program that is established at the Memorandum to Cabinet phase cannot be changed at the Treasury Board submission phase.  The Auditor General identified this as a major cause of alignment problems.  If, as a Treasury Board submission is being prepared, the circumstances surrounding the implementation of the program change, there is no way to adjust the funding profile in the Treasury Board submission.  Departments that need to adjust the funding profile must submit the request during the reprofiling exercise that takes place with the Annual Reference Level Update process.  The Committee believes that the setting of funding profiles should be flexible enough to adapt to changing circumstances.  Therefore, the Committee recommends that:

RECOMMENDATION 7

The Treasury Board Secretariat work with the Privy Council Office to allow the funding profile of new programs to be altered at the Treasury Board submission phase to better reflect the needs of these programs.