51 Elizabeth II, A.D. 2002, Canada

Journals of the Senate

1st Session, 37th Parliament

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Issue 121 - Appendix "B"

Thursday, June 6, 2002
1:30 p.m.

The Honourable Rose-Marie Losier-Cool, Speaker pro tempore

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Thursday, June 6, 2002

The Standing Senate Committee on National Finance has the honour to present its

SEVENTEENTH REPORT

Your Committee, to which were referred the 2002-2003 Estimates, has in obedience to the Order of Reference of March 6, 2002, examined the said estimates, more specifically, the Government Contingencies Vote - Treasury Board Vote 5 and herewith presents its third interim report.

Respectfully submitted,

LOWELL MURRAY

Chairman

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INTRODUCTION

In preparing a budget it is virtually impossible to accurately forecast all future requirements. Therefore, a sound budget will contain an allowance for unforeseen expenditures. The Government of Canada has seen fit to include such provisions in the Appropriations Act since the fiscal year 1876-1877. The wording of this Vote has changed over the years to reflect the concerns of Parliament and the needs of the government of the day. The current form of the Vote in the Treasury Board Estimates, known as Government Contingencies—Vote 5, was established in the fiscal year 1964- 1965. Since that time the Auditor General and both Houses of Parliament have on occasion expressed concerns regarding the use and the scope of the activities funded through the Contingency Fund.

The manner in which contingency funds are used has been a recurring concern for this Committee, which last examined the issue in the late 1980s. In its December 16, 1986 Report on Supplementary Estimates (A) 1986-1987 the Committee found two different explanations of the purpose for Vote 5. In one instance the stated purpose, in part, was "for urgent expenditures of a miscellaneous character which cannot be foreseen when Estimates are drawn up.'' In another instance the Committee noted that the stated purpose of to vote was "to provide for miscellaneous minor and unforeseen expenses.'' The Committee recommended that the Treasury Board provide a clarification between "unforeseen expenses'' and "urgent expenses.'' In response the Treasury Board adopted the current definition, which contains no reference to "urgent expenditures.''

Elsewhere in its 1986 Report, the Committee observed that there was ambiguity in the allotment of Vote 5 funds for non-paylist items. Consequently, it recommended that the Treasury Board draw up a set of guidelines to assist the Treasury Board Secretariat in assessing the merits of requests for funds to cover non-paylist expenses.

In its November 29, 1989 Report on Supplementary Estimates (B) 1988-1989 the Committee noted that;

"In cases of urgency, and where the Treasury Board is satisfied that the authority can normally be sought through an Appropriation Act, the Contingences Vote is often used to pay for new grants not listed in the Estimates, or to defray additional operating expenditures of new programs, program activities, boards and agencies whose budgets are typically (and deliberately) underestimated in the Main Estimates'' (page 3).

The same report also noted that the Treasury Board felt that:

"The current Vote wording of the Government Contingencies Vote provides the government with broad flexibility to provide funding not only for paylist shortfalls but to meet unforeseen expenses and to provide for specific payment authorities. The operating principles under which the Vote is operated, however, limit the use of the authority provided and ensure that an appropriate level of Parliamentary control exists''(page 3).

The Committee noted that an appropriate level of Parliamentary control exists only as long as the current operating principles continue to be followed.

More recently, in its June 12, 2001 Report, the Committee expressed concern about the creation of alternative delivery systems for government programs that relied on the authority of Vote 5 for their funding. Finally, on April 23, 2002 the Committee began a new set of hearings on the use of the Treasury Board's appropriations under Vote 5 to fund various government activities. The Committee heard from Sheila Fraser, the Auditor General whose audit of the use of Vote 5 funds is discussed in her report to the House of Commons in April 2002. On May 1, Mr. Richard Neville, Deputy Comptroller General of the Treasury Board Secretariat and Mr. David Bickerton, Executive Director, Expenditures Operations Secretariat, answered questions on technical aspects surrounding the operations of the contingency account. On May 8, Mr. Frank Claydon, Secretary of the Treasury Board and Comptroller General of Canada, along with Mr. Neville answered questions on the broader issues surrounding the use of this Vote.

GENERAL BACKGROUND

The Government supply process, the method by which departments receive authority to spend monies out of the Consolidated Revenue Fund, begins with the presentation of the Main Estimates in March. In these documents the departments outline their planned spending for the upcoming fiscal year. Unfortunately, departments cannot always anticipate all of their future requirements. Hence, the supply process allows them to seek additional appropriations through the Supplementary Estimates, which are usually submitted to Parliament on three occasions during the fiscal year, June, December and March.

However, there are times when a department wants funding for an item after the presentation of the Main Estimates but before it can obtain approval from Parliament in the Supplementary Estimates. For these occasions, the department may obtain funding from the Treasury Board's Contingency Fund, established through its Vote 5 in the Main Estimate. Vote 5 also allows the Board to provide permanent Parliamentary funding to departments, usually at year-end, for certain non-discretionary salary costs that cannot readily be forecast for inclusion in the Main Estimates.

Parliamentary authority for the use of contingency funds is stated in wording of the Treasury Board Vote 5 in the Appropriation Bills:

Subject to the approval of the Treasury Board, to supplement other appropriations for paylist and other requirements and to provide for miscellaneous, minor and unforeseen expenses not otherwise provided for, including awards under the Public Servants Inventions Act and authority to re-use any sums allotted for non-paylist requirements and repaid to this appropriation from other appropriations.

The Treasury Board must approve all departmental requests for use of the Contingency Fund. All allocations, except for unforeseen salary costs, must be reimbursed to the Fund. Any remaining balance lapses at year-end. The Contingency Vote has historically lapsed most of its appropriation at the end of each fiscal year. However, because departments are required to reimburse the Fund, it becomes in effect a revolving fund. Typically, total annual expenditures from Vote 5 often surpass the original appropriation level obtained in the Main Estimates.

THE PROCESS

After Main Estimates are examined and the Supply Bill is approved, the Treasury Board has complete authority to use the Contingency Fund within the limitations of the Vote wording without further Parliamentary approval. Applications by departments for contingency funds must conform to a set of guidelines set out by the Treasury Board. The Treasury Board Secretariat reported these to the Committee in 1989:

1. As the authority for payments out of the Contingency Fund is contained in the Vote 5 wording, all such payments must be fully consistent with that wording itself (if necessary, they could be legitimate charges to Vote 5).

2. As a general rule, permanent charges will not be made to the Vote for requirements other than paylist shortfalls or awards under the Public Service Inventions Act. All other advances from the Contingencies Vote should be considered temporary advances to be covered by items included in subsequent Supplementary Estimates and reimbursed when the associated appropriation act is passed.

3. When cash advances are requested to meet a financial requirement, the Treasury Board must be assured that the payment is within the legal mandate of the department and that there is a valid cash requirement that must be met before Supplementary Estimates are approved.

4. When making a transfer to provide authority for a payment, the Treasury Board must be satisfied that there is valid and sufficient reason why the payment must be made before normal parliamentary approval is received. If the payment could reasonably be deferred until Supplementary Estimates are tabled and Parliamentary authority granted via an appropriation act, the contingency funding should not be provided to grant such authority.

Later, the Treasury Board Secretariat added four more:

5. Sufficient funds must be available within Treasury Board Vote 5.

6. The department's existing appropriated authority must be insufficient to cover existing requirements and those of the new initiative (excluding grant items) until the end of the current Supply period.

7. There must be a sense of urgency related to the initiative such that the expenditure must be made prior to Parliament's approval of the item in an appropriation act.

8. There must be a valid, legally incorporated recipient in existence to whom the grant is to be paid.

These guidelines are in effect today, and the Secretariat uses them to assess each departmental request for access to Vote 5. It then submits the request to the Treasury Board with its recommendation. Of the eight guidelines used by Treasury Board Secretariat, Treasury Board ministers have approved only the first four as formal Treasury Board policy. The others were developed internally, by the Secretariat, and have not yet received formal approval by the Board.

If the application is approved, the recipient department must list the amount it receives as a requirement in its Supplementary Estimates. When the Supply Bill for the Supplementary Estimates is approved the department reimburses the Contingency Fund.

THE ISSUES

During the hearings, several issues concerning the use of the Government Contingency Fund were identified. Most of the concerns revolve around the Government's accountability to Parliament.

A. The Vote Level

Every fiscal year the government presents Parliament with a request for a specific level of funding for contingencies. For the fiscal year 2002-2003 the total Main Estimates are approximately $172 billion and the Vote 5 level is set at $750 million, which is 0.44 per cent of Main Estimates. As contingency funds are a voted budgetary item, as opposed to statutory expense, it might be better to examine the Vote 5 level in the context of the voted budgetary items. Historically, the contingency vote level was set at approximately 1 per cent of voted budgetary Main Estimates, although as is evident in Table I, the level has ranged between 0.85 per cent and 1.7 per cent since the fiscal year 1990- 91. Over the decades the actual Vote 5 level has steadily increased from $90 million in the fiscal year 1974-1975 to $750 million in the fiscal year 2002-2003.

TABLE I

Contingency Vote 5 Level and
Share of Voted Budgetary Main Estimates

Other jurisdictions that use the Westminster model follow different rules as they relate to contingency votes. In the United Kingdom, there is no statutory limit on the government's spending on contingencies although there is a notional ceiling of 1 per cent. In Australia, there is a statutory provision of $2.5 billion (Aus) or approximately 1.5 per cent of appropriated estimates. The Auditor General did not have any problems with the current level and the Treasury Board Secretariat felt that the current level was adequate to meet government needs at this time.

B. The Treasury Board's Authority Under Vote 5 Contingency Fund

There is concern about the funding authority that Vote 5 confers upon the Treasury Board. Upon examination of the wording of the Vote, it appears that it confers the following funding authority on the Treasury Board:

- The authority to supplement other appropriations for paylist items;

- The authority to provide for other requirements;

- The authority to provide for miscellaneous, minor and unforeseen expenses not otherwise provided for;

- The authority to make awards under the Public Services Inventions Act; and

- The authority to re-spend any sums allotted for non-paylist requirements and repaid to the vote from other appropriations.

Both the Auditor General and the officials of the Treasury Board Secretariat agree that the government has far more authority than it has ever used under this Vote. Treasury Board officials have pointed to this and other interpretations to suggest that the Government has been quite restrained in its use of the Vote. Under this authority, it is possible for the Board to make expenditures on initiatives that never receive prior Parliamentary examination. Normally, if a Contingency Fund allocation is provided to a department for a non-paylist expenditure, then the department is required to reimburse the Fund through appropriations obtained in Supplementary Estimates. In this way, the expenditure is brought to the attention of Parliament, which then approves the spending retroactively when it passes the Appropriation Bill. However, it seems that difficulties arise if the Treasury Board pays for the same initiative directly from the Contingency Fund. The Auditor General indicated that if the Board were prepared to accept such an item as a permanent charge against the Vote, then there would be no need to go back to Parliament to have the expenditure approved. However, Treasury Board officials could not recollect ever making a direct payment from the fund and not seeking reimbursement through the Supplementary Supply process. Furthermore, they have indicated that it is their policy to seek reimbursement, wherever it is appropriate, and thereby obtaining Parliaments approval for all expenses.

C. Miscellaneous, Minor and Unforeseen

The legal authority for contingency fund expenditures is found in the Vote wording. Unfortunately, the wording lacks clarity. The Auditor General observed that the wording of the Government Contingencies Vote is extremely broad, and that the Treasury Board Secretariat has not defined the words "miscellaneous, minor and unforeseen expenses not otherwise provided for'' in any way. According to her "This wording has provided the Secretariat with considerable latitude over the years in the way it interprets the spending authority.'' Furthermore, she noted that during the audit that led to her April 2002 Report, it was found that even the analysts at the Secretariat had different views about the meaning of these terms. This latitude in the interpretation of the wording is a concern to some Senators. The Auditor General believes that this situation has given rise to government spending activity that has not received the approval of Parliament. During Committee hearings she stated that: "government spending on grants, under interim authority from the Government Contingencies Vote, may be falling outside Parliament's intent.''

Mr. Neville agreed that the wording in Vote 5 is very broad. However, he does not agree that this has led to any abuse of the government's spending authority. He rightly observes that "the use of the authority granted through Vote 5 has always been more restrictive than the uses authorized by Parliament.'' So while the Vote wording is broad enough to "allow the Government to respond to any unforeseen circumstances, the Government practice is to use this spending authority as a temporary financing mechanism to deal with urgent and unforeseen matters that require Government financing.'' The implication is that items receiving contingency funding, except for salary costs, will eventually be approved by Parliament through the Supply for Supplementary Estimates.

He also assured the Committee that "Access to Vote 5 is carefully controlled, particularly in the case of new grants or increases to existing grants. These requests are approved only in exceptional circumstances when it is demonstrated that there is a need for government action.'' Furthermore as a guide to assist the analysts in their work, a set of guidelines had been developed. These guidelines are strictly adhered to by the Secretariat. Mr. Neville said that "the Treasury Board Secretariat has managed this fund with an appropriate level of scrutiny and diligence and has always obtained the approval of the Treasury Board for requests to access Treasury Board Vote 5.''

Nonetheless, the current wording of the Vote creates uncertainty in the use of Vote 5 funding. As different analysts have different interpretations of the words "miscellaneous, minor and unforeseen expenses'' it is to be expected that they may make different decisions on similar applications. After questioning the witnesses at length about these and other terms in the wording of Vote 5, the Committee found that the greatest difficulty lay with the term "minor'' because it is dependent on the context in which the approval is sought. This term is potentially susceptible to the widest interpretation of all the terms in the Vote wording. Table II illustrates the variety of government activities that have received Vote 5 support in recent years. These items were selected because they are representative of the wide-ranging nature of requests that are received by the Treasury Board for contingency funds. The Committee is concerned that the current wording of the vote confers too much spending power on the Treasury Board. The Senate may wish to circumscribe the use to which these funds are put.

Mr. Neville was particularly concerned about unduly restricting the government's ability to function in times of emergency. He observed that while there have been minor modifications to this Vote since the mid-1970s there are limits to what can be done to alter the wording. Introducing more restrictive wording might seriously restrain the government's ability to act. He felt that it is important to recognize that it is impossible to provide spending authority for every type of expenditure and the government needs some flexibility to cover unforeseen expenses. Even the Auditor General agreed when she stated in her opening remarks that: "the government cannot be expected to anticipate every type of expenditure that may come up in a fiscal year, and it therefore needs some flexibility to cover unforeseen expenses.'' However, the need for clarification remains and Mr. Neville assured the Committee that the Secretariat "will consider options that provide clarity but will also retain the government's flexibility.''

One option might be to replace the word "minor'' in the phrase "miscellaneous, minor and unforeseen'' with the word "urgent.'' It was a recurring notion in this part of the Committee's study of Vote 5 that departments often seek Vote 5 assistance for items that urgently require funding. The concept of urgency might be more easily defined so that all involved in making decisions regarding the use of contingency funds understand it. Consequently, the Committee recommends that:

Recommendation 1

The Government amend the wording of Treasury Board Vote 5 by replacing the word "minor'' in the phrase "miscellaneous, minor and unforeseen expenses not otherwise provided for'' with the word "urgent,'' so that the new phrase becomes "miscellaneous, urgent and unforeseen expenses not otherwise provided for.''

TABLE II

Examples of Treasury Board Contingencies
Vote Items Included in Supplementary Estimates
1996-97 to 2001-02

Supplementary Estimates (A) 1996-97
Department of Canadian Heritage — To establish the Canada Information Office	$ 15,000,000
Supplementary Estimates (B) 1996-97
Department of Foreign Affairs — CIDA, humanitarian assistance or disaster preparedness to countries, their agencies
and persons, to international institutions and Canadian and international non-government institutions	$ 20,000,000
Supplementary Estimates (A) 1997-98
Western Economic Diversification — Contributions under the Red Valley Jobs and economic Restoration Initiative	$ 25,000,000
Supplementary Estimates (B) 1997-98
Department of National Defence — Contributions to the provinces for assistance related to natural disasters	$ 75,000,00
Supplementary Estimates (A) 1998-99
Privy Council — Establishment of the Millennium Bureau of Canada	$ 10,000,000
Supplementary Estimates (B) 1998-99
Department of Finance — Payments to the European Bank for Reconstruction and Development	$ 9,100,000
Department of Human Resource Development — contributions under the
Canadian fisheries Adjustment and Restructuring Plan	$ 55,400,000
Supplementary Estimates (C) 1998-99
Department of Natural Resources — Cape Breton Development Corporation,
additional operating requirements due to unforeseen production delays	$ 36,000,000
Supplementary Estimates (A) 1999-00
Department of Canadian Heritage — National Capital Commission, revitalization of Sparks Street	$ 40,000,000
Supplementary Estimates (B) 1999-00
Department of Justice — Firearms Control Program	$ 41,000,000
Department of Finance — Transfer Payments to the Territorial Governments	$ 102,800,000
Supplementary Estimates (A) 2000-01
Department of Public Works — Canada Information Office, support for a citizen-focused approach to government communications	$ 23,682,000
Department of Indian Affairs — settlement with the Squamish First Nation	$ 58,713,000
Supplementary Estimates (A) 2001-02
Department of Agriculture — payments in connection with the Farm Income Protection Act	$ 100,000,000
Department of Fisheries and Oceans
— Fisheries Access Program	$ 88,000,000

D. The Treasury Board Vote 5 Guidelines

The Committee has also examined the wording of the Treasury Board Guidelines on the use of contingency funds, as well as the Secretariat's additional guidelines. These guidelines were designed to provide guidance to the analysts at the Treasury Board Secretariat. The Committee believes that some changes to the wording would bring greater clarification of the intent of Parliament.

Guideline Number 3

The Committee is concerned that the underlined section in guideline number three (below) provides too broad an interpretation for a request for funding under Vote 5.

"When cash advances are requested to meet a financial requirement, the Treasury Board must be assured that the payment is within the legal mandate of the department and that there is a valid cash requirement that must be met before Supplementary Estimates are approved.''

Consequently, the Committee recommends that:

Recommendation 2

The Treasury Board amend the wording in Treasury Board guideline number three so that the phrase "is within the legal mandate of the department'' is replaced by the words "conforms to the statutory requirements of the department or the regulations of an existing program.''

The Committee further recommends that:

Recommendation 3

The Treasury Board should amend the wording in Treasury Board guideline number three so that the phrase "valid cash requirement'' is replaced by the words "valid and urgent cash requirement.''

Guideline Number 4

The Committee also believes that the Treasury Board should amend the underlined wording of guideline number 4, which reads:

"When making a transfer to provide authority for a payment, the Treasury Board must be satisfied that there is valid and sufficient reason why the payment must be made before normal parliamentary approval is received. If the payment could reasonably be deferred until Supplementary Estimates are tabled and Parliamentary authority granted via an appropriation act, the contingency funding should not be provided to grant such authority.''

The phrase "valid and sufficient reason'' should be changed to read "valid and compelling reason,'' because the principle involved here is that no expenses shall be incurred without Parliament's authorization. That is the basic principle that needs to be respected.

Consequently, the Committee recommends that:

Recommendation 4

The Treasury Board amend the wording in Treasury Board guideline number four so that the phrase "valid and sufficient reason'' is replaced by the words "valid and compelling reason.''

Guideline Number 6

The Committee also wants the Treasury Board to amend the underlined wording of guideline number six, which reads:

"The department's existing appropriated authority must be insufficient to cover existing requirements and those of the new initiative (excluding grant items) until the end of the current Supply period.''

The phrase "new initiative'' is too broad and needs to be more precise. Consequently, the Committee recommends that:

Recommendation 5

The Treasury Board amend the wording in Treasury Board guideline number six by inserting the phrase "contained in a budget speech'' after the words "new initiative.''

Guideline Number 7

The Committee also believes that the Treasury Board should amend the underlined wording of guideline number seven, which reads:

"There must be a sense of urgency related to the initiative such that the expenditure must be made prior to Parliament's approval of the item in an appropriation act.''

The phrase "a sense of urgency'' is too vague. Departments should have to demonstrate that their need is indeed an urgent one. Consequently, the Committee recommends that:

Recommendation 6

The Treasury Board amend the wording in Treasury Board guideline number seven so that the phrase "a sense of urgency'' is replaced by the words "a demonstrated urgency.''

Guideline Number 8

The Committee also wants the Treasury Board to amend the wording of guideline number eight, which reads:

"There must be a valid, legally incorporated recipient in existence, to whom the grant is to be paid.''

The Committee would like some reference to the conditions and regulations governing grants and contributions. Consequently, the Committee recommends that:

Recommendation 7

The Treasury Board should amend the wording in Treasury Board guideline number eight by adding after the word "paid'' the phrase "in accordance with the government's regulations on grants and contributions.''

At this time guidelines number 1 through 4 have received formal approval of the Treasury Board, while guidelines number 5 through 8 have only been approved by the Secretariat. The Committee believes that guidelines 5 through 8 should formally have equal weight as the first four guidelines. Consequently, the Committee recommends that:

Recommendation 8

The Treasury Board give formal approval to all eight of the Treasury Board guidelines on the use of contingency funds.

E. Program vs. Spending Authority

1. The Auditor General

The Auditor General believes that in the matter of the use of contingency funds a distinction exists between the concept of "program authority'' and "spending authority.'' In her view, a failure on the part of the government to recognize this difference has led to expenditures in grants by two departments that had not received spending authority from Parliament when the payments were made. By program authority the Auditor General means the substantive legislative provisions establishing a department's mandate and the programs it administers. Spending authority, on the other hand, is the authority to make a payment under a given program. For many government programs, continuous, non-lapsing, spending authority is enshrined in the statutes that set out the programs. For example, the Old Age Security Act authorizes the payment of benefits for Old Age Security. The spending authority that she is concerned about is the authority that Parliament grants to the government annually through appropriation acts. The government relies on funds voted by this process for many programs. This money may be spent only for the purposes outlined in the various votes listed in the schedules to the appropriation acts. Although Vote 5 can supplement a departmental vote by providing additional funds, in her view it cannot provide authority to pay grants that are not covered by the wording of the departmental vote for grants. If grants were not listed in the Estimates at the time the payments were made, or they did not fall within a class of grants listed in the Estimates, then, in her view, spending authority pursuant to the departmental votes did not exist when the grant payments were made. While Vote 5 may be used to supplement departmental votes for grants or classes of grants already listed in the Estimates, it should not, in her view, be used to fund grants not listed in the Estimates. Consequently, the Auditor General has claimed that the Treasury Board Secretariat should submit to the Treasury Board a formal policy or guidelines governing the use of the Government Contingencies Vote for grants, to ensure that spending authority is obtained before such payments are made.

2. The Treasury Board

The Treasury Board officials do not entirely agree with the Auditor General's interpretation of the authority conferred to the government under Vote 5. As Mr. Bickerton explained, before the Committee the legislative authority for payments derives from the legislation within a department and that "Vote 5 was used as the authority to provide the cash and to provide the legislative authority pending the passage of Supplementary Estimates.'' Furthermore, he explained, "there are two basic situations in which a department will seek funding from the Contingency Fund at the same time as it receives approval to include an item in Supplementary Estimates. The first is where there is a cash requirement and insufficient funds.'' The second involves a department that "does not have sufficient authority to make a specific payment but can be granted that authority through an appropriation act, and that the payment will be required before supply is approved.''

On the question of the use of Treasury Board Vote 5 to authorize the payment of grants in advance of the approval of Parliament, Mr. Neville reminded the committee that "Supplementary Estimates are intended to provide additional spending for new programs or for revisions to existing programs, including grants and contributions that occur too late or outside of the Main Estimates process.'' According to Mr. Neville, "the government has, on occasion, used the authority in the vote wording to authorize new grants or increases to existing grants.'' He also noted "Ministers may request temporary authority access to Vote 5 funding on the basis that these payments are urgently required and cannot wait until the next supplementary Estimates.'' Accordingly, the Treasury Board Secretariat determines the legitimacy of the request for Vote 5 funds, and it assesses the degree of urgency and the appropriateness of the amount requested. He noted that not all requests for contingency funding are approved.

It seems that the Treasury Board rejects the distinction between program authority and spending authority, at least for the purposes of Vote 5. In terms of accountability to Parliament, this is dangerous. Followed to its logical, if extreme, conclusion, Parliament would be asked to pass one vote for each department, to be spent in accordance with the legislative mandate of that department. There would be no need for detailed Estimates at all. Consequently, the Committee recommends that:

Recommendation 9

The Treasury Board adopt a formal policy or guideline governing the use of the Government Contingencies Vote for grants, which ensures that spending authority is obtained from Parliament before such payments are made.

F. Concluding Comment

The Committee's interest in Vote 5 is continuous. Treasury Board has indicated that it is currently reviewing its practices and guidelines on the use of Vote 5 funds. It expects to announce any change in policy in the Autumn of 2002. The Committee will review the new policy and will comment further at that time.

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