Posts Tagged ‘parliamentary budget officer’

What if Canada had a PEFA Assessment? [Part 2]

Monday, June 18th, 2012

Part 2: PI-15 to PI-28

Doug Hadden, VP Products

I suggested in my previous post, What Canada can learn from Developing Countries on Public Financial Management sustainability, [Part 5], that we could learn more about holistic public financial management. In particular, the PEFA assessment methodology. This is Part 2. [Part 1 covers PI-1 to PI-14]

PI-15. Effectiveness in collection of tax payments

Factors:

(i) Collection ratio for gross tax arrears, being the percentage of tax arrears at the beginning of a fiscal year, which was collected during that fiscal year (average of the last two fiscal years).

(ii) Effectiveness of transfer of tax collections to the Treasury by the revenue administration.

(iii) Frequency of complete accounts reconciliation between tax assessments, collections, arrears records and receipts by the Treasury.

A 2006 report from the Auditor General of Canada about the Canada Revenue Agency found  that as of “31 March 2005, the total amount in undisputed tax debt stood at $18 billion, of which the Agency expects to collect only about $13.3 billion—it considers the rest to be doubtful accounts and not collectible. The Agency also writes off a certain amount in uncollectible unpaid taxes every year—in 2004–05 the amount was $2.7 billion.”

It is likely that the Canada Revenue Agency has improved the following deficiencies from 2006 that related to the factors:

  • Unsophisticated risk approach
  • Untimely collection
  • Tax debt growing faster than the rate in which taxes are paid

PI-16. Predictability in the availability of funds for commitment of expenditures

Factors:

(i) Extent to which cash flows are forecast and monitored.

(ii) Reliability and horizon of periodic in-year information to MDAs on ceilings for expenditure commitment

(iii) Frequency and transparency of adjustments to budget allocations, which are decided above the level of management of MDAs.

My sense is that the federal government should be rated relatively high on these requirements. Cash is centrally managed. I expect that cash flow is well managed and that treasury functions like investments and bonds are also well managed.

Allocations are predictable except when there is an unusual circumstance like the financial crisis. Commitment information is provided from all MDAs (Ministries, Departments, Agencies). There are six month reviews.

FreeBalance developed the initial generation of products to manage budget, allotment and commitment control. Manual and computerized accounting systems did not track whether MDAs were over or under spending. Or forecasting the year-end position. The Government of Canada term to calculate the amount left to spend is the “free balance.” [budget – commitments – obligations – actuals = free balance]

PI-17. Recording and management of cash balances, debt and guarantees

Factors:

(i) Quality of debt data recording and reporting

(ii) Extent of consolidation of the government’s cash balances

(iii) Systems for contracting loans and issuance of guarantees

Debt information is found budget documents. The cash position is consolidated centrally. My sense is that this is handled quite well in Canada.

PI-18. Effectiveness of payroll controls

(i) Degree of integration and reconciliation between personnel records and payroll data.

(ii) Timeliness of changes to personnel records and the payroll

(iii) Internal controls of changes to personnel records and the payroll.

(iv) Existence of payroll audits to identify control weaknesses and/or ghost workers.

Payroll is effective in the Government of Canada. There are some difficulties with the timeliness of changes to personnel records and payroll whereby one department may be paying for an employee who has transferred to another department. This is likely to change because of a new payroll system that will be implemented.

It’s unlikely that there is a ghost worker problem in Canada. There have been payroll audit such as at CIDA, but it’s probably not a major activity thanks to the reporting of expenses by public servants.

Many MDAs in Canada have strong controls on payroll budgets. Standard payroll or human resource Commercial-off-the-Shelf (COTS) software have no budget controls and are not “budget aware”. So it is possible to over or under-spend the budget. FreeBalance developed salary management software, currently in use in many federal departments to solve this problem.

FreeBalance Performance Budgeting for Human Capital (PBHC) enables MDAs to build payroll spending scenarios based on union collective agreements, payroll rules, salary scales and assumptions around training, vacancies, seasonal employment, leave accrual etc. PBHC takes the actual payroll generated from a pay period to re-forecast potential surplus or deficit situations.

Expense reporting for senior public servants is transparent in the federal government to add a further level of control.

PI-19 Transparency, competition and complaints mechanisms in procurement

Factors:

(i) Transparency, comprehensiveness and competition in the legal and regulatory framework.

(ii) Use of competitive procurement methods.

(iii) Public access to complete, reliable and timely procurement information.

(iv) Existence of an independent administrative procurement complaints system.

The federal government does well in most of these factors based on our experience as a supplier. There is an open procurement system for tenders. There are mechanisms like supplier agreements that enable spend management. Advance Contract Award Notices are used to public sole-source contracts to add competitor feedback to non-competitive procurement.

There are numerous independent complaints systems depending on the nature of the procurement.

There has been some recent criticism about the Royal Canadian Air Force sole-source acquisition of F35 aircraft. My sense is that the F35 acquisition is an exception that proves the rule about procurement transparency. There is reasonable justification for the sole sourcing, although some question the acquisition of a single-engine fighter/interceptor in Canada. They key issue is whether the estimates were accurate – it was fairly open that the acquisition was planned. The Parliamentary Budget Officer first identified the estimation problem. Later, the Auditor General found that “Defence Department officials twisted government rules, withheld information from ministers and Parliament, and whitewashed cost overruns and delays afflicting the F-35 program.”

PI-20. Effectiveness of internal controls for non-salary expenditure

Factors:

(i) Effectiveness of expenditure commitment controls.

(ii) Comprehensiveness, relevance and understanding of other internal control rules/ procedures.

(iii) Degree of compliance with rules for processing and recording transactions.

FreeBalance provides Government Resource Planning (GRP) software to 28 Government of Canada MDAs. The control regime is advanced to include:

  • Commitment and obligation control
  • Segregation of duties
  • Approvals based on context such as by purchasing vehicle or amounts
  • Reporting

PI-21. Effectiveness of internal audit

Factors:

(i) Coverage and quality of the internal audit function.

(ii) Frequency and distribution of reports.

(iii) Extent of management response to internal audit findings.

According to Charles-Antoine St. Jean, the former Comptroller General of Canada, reform of internal audit in the Government of Canada has been slower than expected. Mr. St. Jean spoke at the FMI conference last month in Fredericton. He suggested that weaknesses in internal audit were to be improved in the last five years but has not met. In a previous presentation from 2007, he pointed out that the federal government introduced an internal audit policy on 2005 toreorganize and bolster the internal audit function” and “strengthen public-sector accountability.” The intent was that “Internal auditors will fill an enhanced role” and that “Internal auditors and departmental audit committees will have more independence.” Audit training remains behind schedule.

PI-22. Timeliness and regularity of accounts reconciliation

Factors:

(i) Regularity of bank reconciliations

(ii) Regularity of reconciliation and clearance of suspense accounts and advances.

My sense is that the federal government does well in reconciliation.

PI-23. Availability of information on resources received by service delivery units

Factor:

Collection and processing of information to demonstrate the resources that were actually received (in cash and kind) by the most common front-line service delivery units (focus on primary schools and primary health clinics) in relation to the overall resources made available to the sector(s), irrespective of which level of government is responsible for the operation and funding of those units.

Many service delivery units at the sub-national level even though funding originates with the federal government. It is somewhat difficult based on the federal nature of government in Canada, the complexities of a developed countries and the country size to provide this information. As mentioned in Part 1, Statistics Canada attempts to overcome these constraints.

PI-24. Quality and timeliness of in-year budget reports

Factors:

(i) Scope of reports in terms of coverage and compatibility with budget estimates

(ii) Timeliness of the issue of reports

(iii) Quality of information

The federal government provides quarterly reports for all MDAs. These are produced in a timely manner.

PI-25. Quality and timeliness of annual financial statements

Factors:

(i) Completeness of the financial statements

(ii) Timeliness of submission of the financial statements

(iii) Accounting standards used

As above, the annual reports produced are comprehensive. The Canadian federal government is unique among G8 countries for the quality of financial statements and financial processes. As indicated recently:

For the 13th consecutive year, the Government has received an unqualified audit opinion, now referred to as an unmodified audit opinion under the new Canadian auditing standards, from the Auditor General of Canada on the financial statements.

PI-26. Scope, nature and follow-up of external audit

Factors:

(i) Scope/nature of audit performed (incl. adherence to auditing standards).

(ii) Timeliness of submission of audit reports to legislature.

(iii) Evidence of follow up on audit recommendations.

The Auditor General of Canada has an international reputation for audit quality, for performance audit and for motivating changes from the audit recommendations.

PI-27. Legislative scrutiny of the annual budget law

Factors:

(i) Scope of the legislature’s scrutiny.

(ii) Extent to which the legislature‟s procedures are well-established and respected.

(iii) Adequacy of time for the legislature to provide a response to budget proposals both the detailed estimates and, where applicable, for proposals on macro-fiscal aggregates earlier in the budget preparation cycle (time allowed in practice for all stages combined).

(iv) Rules for in-year amendments to the budget without ex-ante approval by the legislature.

The Westminster system in use in Canada provides incentive for party voting. Members of the government party vote for the budget to prevent the government from falling. There had been very limited scrutiny of the budget law in Canada until after the Federal Accountability Act came into force.

The 2005 IMF study suggests that there is not sufficient time provided to Parliament to evaluate the budget and with limited oversight:

In Canada, the legislature has largely been focused on optimizing the budget process, as opposed to taking an active role in the formulation of the budget…

Parliament receives the budget relatively late, less than two months before the start of the new fiscal year. A quarter of the fiscal year has typically elapsed by the time the budget is approved. In contrast, legislatures of other countries receive the budget two to six months before the new fiscal year, and even earlier in the United States…

As in many parliamentary systems, the Canadian legislature has limited powers to change the submitted budget. Parliament can reduce, but not increase, funding for line items, but has otherwise only the choice of approving or rejecting the government’s spending proposals.

The Westminster system has a notion of ‘budget confidentiality’. Budget information leaked before tabled can provide organizations with unfair advantages. Yet, this notion of confidentiality often extends past the point at which the budget is tabled. There has been significant criticism that the methods by which departments will reach spending cut targets has remained confidential.

The Government of Canada created the post of Parliamentary Budget Officer (PBO) in 2006. The post was filled in 2008. The PBO is an independent agency of the Library of Parliament lead by Kevin Page. The drivers for the creation of the PBO were:

  • Unprecedented public demand for transparency and accountability across the public and private sectors
  • A series of large unplanned budgetary surpluses for the Canadian government
  • A number of high profile cost over-runs on major government capital projects
  • New and emerging global standards and best practices to promote financial and budgetary transparency
  • Successive minority governments that are changing the relationship between the government and Parliament A fundamental change has taken place in the way citizens view the government’s stewardship of taxpayer resources

Although there is asymmetrical access to information: the government through the Ministry of Finance and Treasury Board Secretariat have more information and staff, the PBO has been very effective, in my opinion,  in helping parliamentarians to consider budget ramifications. “Even in a Westminster model, Parliament has the fiduciary obligation to scrutinize the planned expenditures of the government.”

PI-28. Legislative scrutiny of external audit reports

Factors:

(i) Timeliness of examination of audit reports by the legislature (for reports received within the last three years).

(ii) Extent of hearings on key findings undertaken by the legislature.

(iii) Issuance of recommended actions by the legislature and implementation by the executive.

Parliament in Canada has a public accounts committee to review audit reports. The “sponsorship scandal” is an example of the impact of external audit to parliamentary actions.

 

A Tale of Two Budgets

Wednesday, April 13th, 2011

It was the worst of times…

Doug Hadden, VP Products

Credible budgets. Developing nation governments are often criticized for passing budgets that are not credible. Failure to provide effective cost estimates. Lack of a multiple-year perspective. Not accounting for recurrent costs for current programs. Poor budget transparency.

Yet here we are, with budget theatre in two G7 countries: Canada and the United States. In Canada, the opposition parties announced, within minutes of budget release, that they could not support the budget. No debate. The government fell three days later on a confidence motion. Perhaps the budget was designed by the governing party to generate an election: an election budget.

Meanwhile, south of the border, after a full year of deliberations and almost 200 days of continuing resolutions, the American government avoided a shut down by minutes.

What lessons for Developing Countries?

Developing country governments are evaluated against the Public Expenditure and Financial Accountability Framework. This framework is an effective benchmark and helps government modernization. How would Canada and the United States measure on the following high level PEFA measurements?

1. Credibility of the budget – The budget is realistic and is implemented as intended
2. Comprehensiveness and transparency – The budget and the fiscal risk oversight are comprehensive, and fiscal and budget information is accessible to the public.

Budget Credibility

Canada: the Parliamentary Budget Officer reports that estimates for F-35 fighters are not credible, appear to be lower than the cost paid by the US forces.

United States: economists continue to debate whether tax cuts create economic growth while the IMF suggests that the US has no credible strategy to handle the debt

Comprehensiveness and Transparency

Canada: the Federal Accountability Act brought in by the Harper government created the Parliamentary Budget Officer yet appears to be underfunding the office that was created to improve transparency

United States: the actual US debt is far higher than reported because of the lack of showing the impact of recurrent expenditures for entitlement programs. As congress bickers, the funding for the data.gov transparency portal is slashed by 75%.

Worst of Times?

The lessons for developing nations from Canada and the United States seem to be:

  • Transparency brings reason and facts to budget debates. It’s best to avoid being transparent. After all, the value of government programs messes up debate and causes compromise.
  • Credibility of budgets is far less important than the politics of budgets. The notion of the budget as the legal embodiment of government policy is just a subtle concept.
  • Debt is something for the next set of politicians to deal with. Recurrent expenses from capital programs and entitlements must be on the books for the private sector, but accrual accounting should really be avoided for governments.

It’s high time for politicians in Canada and the United States to give their collective heads a shake. The budget fiasco doesn’t make these countries look like banana republics. That’s because many so-called banana republics have more effective budget processes!

 

 

 

Government Budgeting: Can it Get More Exciting than This?

Thursday, March 31st, 2011

Doug Hadden, VP Products

Comedian Stephen Colbert has captured some of the “truthiness” of government budget politics. This could go a long way to highlight the critical importance of budgets and, dare I say, government accounting. That’s because budget processes are so important that they must become fodder for satire.

The Canadian government fell based on a vote of confidence, triggering an election. (And explained very well in the first video clip below by a somnolent BBC reporter.) There is an interesting transparency and accountability dynamic here. The Conservative Party have won two minority governments partly based on a commitment for transparency. The Federal Accountability Act included the creation of a new post: the Parliamentary Budget Officer. This post is independent of the government and an officer of the Library of Parliament. The PBO, Kevin Page, criticized the government budget for lacking sufficient information on how estimates were developed. There has been particular debate about the cost of F-35 aircraft.

So, in typical Canadian fashion, the office set up by the government has been responsible for the fall of the government. As it was with the sponsorship scandal when the previous Liberal government set up a public inquiry.

Regardless of any viewpoint on the budget itself, it is important to realize that credible budgets and budget transparency is critical for good governance. Budget transparency is also critical. Canada is not a leader in budget transparency because of the practice of budget and cabinet confidentiality. However, Canada seems to be a leader in budget satire, as witnessed by the second video below by comedian Rick Mercer.

Yes, the Library of Parliament is a FreeBalance customer, as is the House of Commons and the Senate.