Leonard Preyra - MLA for Halifax Citadel – Sable Island

PUBLIC ACCOUNTS COMMITTEE

Ms. Diana Whalen (Chairman)

Mr. Leonard Preyra (Vice-Chairman)

Mr. Clarrie MacKinnon

Ms. Becky Kent

Mr. Mat Whynott

Ms. Lenore Zann

Hon. Keith Colwell

Hon. Cecil Clarke

Mr. Chuck Porter

[Ms. Pam Birdsall replaced Ms. Becky Kent]

[Mr. Leo Glavine replaced Hon. Keith Colwell]

WITNESSES

Deloitte & Touche LLP

Ms. Shannon MacDonald, Atlantic Practice Managing Partner

Mr. William Hogg

In Attendance:

Mrs. Darlene Henry

Legislative Committee Clerk

Ms. Kim Leadley

Legislative Committees Office

Mr. Jacques Lapointe

Auditor General

Ms. Ann MacDonald

Assistant Auditor General

Mr. Neil Ferguson

Legislative Counsel Office

Ms. Karen Kinley

Legislative Counsel Office

HALIFAX, WEDNESDAY, JANUARY 20, 2010

STANDING COMMITTEE ON PUBLIC ACCOUNTS

9:00 A.M.

CHAIRMAN

Ms. Diana Whalen

VICE-CHAIRMAN

Mr. Leonard Preyra

MADAM CHAIRMAN: It’s just after nine o’clock so I’d like to call the meeting to order today. This is a meeting of the Public Accounts Committee and we have with us today witnesses from Deloitte & Touche who were asked to come before the committee.

What I’d like to do to begin with is to have the members of the committee and our guests introduce themselves.

[The committee members and witnesses introduced themselves.]

MADAM CHAIRMAN: Thank you so much. As is our usual process, we begin with an opening statement. If you had anything prepared then we’d certainly give you a few minutes. We ask that it not be more than five or six minutes, thank you very much. Ms. MacDonald.

MS. SHANNON MACDONALD: Thank you for inviting us here today. We’re very pleased to have a chance to help with some interpretation around this report. We were very honoured and pleased to be part of this report in authoring it. The timing for when we began was shortly after the election, so after the election in June we were hitting the ground running in the first week of July and spent a fairly intense summer working through reports prepared by government. We would add our analysis and discussion and many questions and meetings on these topics.

The prime objective for our being involved was to make sure things – specific items, and I shouldn’t just say things, there was a very specific list of items – that they were in accordance with the appropriate accounting principles and that they met the legislative requirements, so we looked at those items in that context.

We were asked to do things in two phases. Phase 1 is the very fast, intensive piece of work through July and August, where we looked specifically at economic assumptions, university assistance, the offshore revenue, building for growth, capital programs, provisions for losses and bad debts, and pension plans, as well as the expenditure forecasts. We very much used the status quo at the time so what did we know at the time, through July and August, analyzed on that basis and created some analysis and interpretation of the trends. That work was done by the middle of August.

Then we proceeded to do Phase 2 which was accounting related. So we looked there at five specific areas: the budgeting process; accounting treatment for operating grants that were prepared in advance of the fiscal year, so any grants that went out ahead of the year; the Auditor General’s qualification and scope limitation on third-party revenues; improvements in the timelines process for the business plans for district health authorities as well as the school boards; and any other relevant financial matters – for that we looked a little bit more closely at expenditures in the health and education sectors and what could be done there.

Our work in those areas resulted in accounting recommendations and financial management recommendations really throughout Phase 1 and Phase 2. You will see in the report where we’ve identified things that just need to continue as is, things that may need to change, or some options that could be considered. Again, it was at the time when government was really just getting introduced to the depth of the financial information.

That really is a summary of the work we went through and we’d be happy to answer any questions on it.

MADAM CHAIRMAN: Thank you very much. With that we’ll turn to the Liberal caucus for the first 20 minutes of the questions. Mr. Glavine.

MR. LEO GLAVINE: Thank you, Madam Chairman. Thank you for coming in today, Mr. Hogg and Ms. MacDonald. This study has, I guess, some value, it hasn’t been without controversy obviously. That being said, I guess today is to explore its value to the taxpayer, where some of the recommendations have been going or not so.

I wanted to first of all take a look at the fact that yes, Nova Scotia taxpayers put up $100,000 for this study. I was wondering if you could give us a breakdown of that $100,000 in terms of Phase 1 and Phase 2, and where and how, in fact, that money was used during the study period?

MS. SHANNON MACDONALD: Sure. The money was entirely the time of the professionals involved. The billings were provided 50 per cent for Phase 1, 50 per cent for Phase 2. The true intensity of work, I would say, was probably more 60/40, but 100 per cent of that payment went to the time of professionals, CAs and master-qualified people who are able to look at financial information with great expertise.

MR. GLAVINE: Thank you for that. The next question hopefully will give us some insight on how the study was framed, the scope, the access that you had, the depth of information available to you in the study. I was wondering, could you kind of give us that context back in June, July when you started to do this work? If you could frame that for us I would appreciate it.

MS. SHANNON MACDONALD: Sure. As I mentioned, we began our work the first week of July. I would say for the two weeks prior to that the staff of the Ministry of Finance knew that we would be doing the work, so they were preparing. We spent the first week confirming information that we needed with them. We received a huge amount of co-operation from the staff of Treasury and the Ministry of Finance. We asked for a lot and we got a lot, so they were definitely ready for us and co-operative. We asked for many reports that were completed, published in the past, legislation, all those sorts of things, as well as analyses, spreadsheets, things that they would have prepared. Based on that, we interpreted it and we also created some of our own, and I would say by mid-July we had everything we needed from them. I’ll again make the comment that it was a lot of information.

MR. GLAVINE: Well, you certainly represent a very highly regarded institution and business. I’m just wondering, as you set down some of the parameters, were they pretty well all of your expectations for what you would have available to study the finances of the province and the processes, were those met?

MS. SHANNON MACDONALD: Yes, we were very pleased with the process. Any risk or process glitch that you may fear did not happen. Where we had limitations in terms of opinions, for example, we were not being asked to give an opinion; where we had to clarify what we were able to do or not do was very much understood. We were also very clear that we were interpreting facts and would stop at the facts, so we were not getting into the area of judgments. I think our position, in terms of what we were going to do and able to do, was very well received. In addition, what we expected of a client to co-operate with us, to help us meet our deadlines and to help us actually answer the request that was proposed in the RFP document was absolutely received by us. It was a very positive client-consultant relationship.

MR. GLAVINE: This is a process possibly that may be engaged again in the future so I was wondering, were there any areas where you were not so satisfied and where defining the process could, in fact, be improved upon?

MS. SHANNON MACDONALD: I don’t think I could. Can you think of anything?

MADAM CHAIRMAN: Mr. Hogg.

MR. WILLIAM HOGG: Not so much changes to the process, but one of the difficulties was the short time frame within which this had to be conducted, so it made it particularly onerous. The difficulty is if you don’t complete the work within a short period of time, then events supercede it and its value is lessened. It’s a very fine balance in having enough time to complete what you need to do, but also keeping it relevant and timely.

MR. GLAVINE: You said you had good co-operation from the Treasury Board and the Ministry of Finance. Did you have to move your work into some of the other departments of government and did you have full access both with Treasury and Finance, and other departments that perhaps your work was engaged with?

MS. SHANNON MACDONALD: Yes, the co-operation persisted. When we went into Phase 2, we did get more specifically into Health and Education for purposes of budget and expenditure levels. We had deputy-level access and senior folks within those two departments who were absolutely as co-operative as what we had experienced with Finance and Treasury, so we were very pleased with that.

MR. GLAVINE: So as we take a look at what you reported in Phase 1 and Phase 2, would you then say definitively there was no data that you were without in order to make some of the projections which the report ended up doing?

MS. SHANNON MACDONALD: No data within reasonable expectations. For instance, when you do the revenue projections you don’t have perfect information, but I think there was enough information to make projections as good as you can make, what we needed was available. Perhaps there’s more data that you would like to have but we wouldn’t have expected it.

MR. GLAVINE: So in making your projections, what were your primary sources that you did use to make those?

MS. SHANNON MACDONALD: Well, when you said projections, sorry, did you say revenue projections?

MR. GLAVINE: In terms of making those, yes, what were the foundation pieces you did use? Was it previous budgets, was it an update that the Finance Department, for example, gave you for the first six months of the year?

MS. SHANNON MACDONALD: At the time that we did this there was quite a change in the forecasts coming out of various economists, so if you looked at the banking

economists, or the government’s, or any chief economists. Over the summer projections were actually taking a significant shift, so we had to ask the departments to update their revenue forecasts. We couldn’t use what had been in place at that point in time.

[9:15 a.m.]

You have great economists on staff who worked hard to update that information and while they were doing that, we were also interviewing APEC. We sourced out economic projections from the banks and based on interviews, and those sorts of readings and discussions, we then took what was updated from Treasury and Finance and built on that.

MR. GLAVINE: So you had your updates, but would you say that a lot of the underlying information, the data available, trend development and so on, was highly related to and based upon the decisions that the previous Progressive Conservative Government had up until the election?

MS. SHANNON MACDONALD: In the area of revenue I would say not. I felt that we were getting fresh information because of the significant changes in mostly the economy at that time. Certainly things like offshore revenue and whatnot were indeed in place and that’s what it is, they were factored in that way. Expense projections were largely predicated on the past, so what other pattern there was to predict future spending was really past spending. Would you add anything to that, Bill?

MR. HOGG: No, I think that pretty well sums it up, keeping in mind – I don’t recall the exact date of the election but it was only shortly after that the work began. So given that fact as well as the instructions, which were to do a projection based on status quo with known programs, there wasn’t any latitude when you consider the timing and the instruction for any sort of reflection of decisions that might have been made or if they had been made in that short time period.

MR. GLAVINE: Thank you. I would say that our caucus felt that the projections were the areas that perhaps had the greatest value in the report that you did deliver. However, did you take into account any of the NDP promises made during the election campaign in developing these projections?

MS. SHANNON MACDONALD: Yes, we did. We took basically their brochure, the NDP brochure that had specified what they intended to invest in or adjust and they had numbers that they had applied at that time. We took those campaign promises, as was costed and we included them in the forecast.

MR. GLAVINE: In looking at a few of the items here, in Phase 1 of the interim report, Assistance to Universities, the report says that, “The lower estimated grant payments in 2009-2010 creates budgetary pressures in subsequent years in order to return to

conventional levels of annual assistance.” By furthering the practice of prepaying university assistance, hasn’t the government simply moved the problem? These same pressures should now apply to 2011-2012.

MS. SHANNON MACDONALD: Our recommendations around that were that it should never have happened in the first place. Once it happens, you do have an issue when you come out of it, so basically we outlined that.

Yes, they’ve continued to do the practice so should they come out of that practice, there will be difficulty for two years as the budget re-patterns because when you have an annual expense you like to keep it in a regular pattern. Once it breaks its pattern, it’s difficult. They’ve kept the new pattern but if you need to go back to the past practices, there will be a financial management issue and reporting issue to clarify how that works. I don’t know if Bill can add to that – I’m not sure if I was clear enough in my answer.

MR. GLAVINE: I’ll just dwell on it a little bit longer, if I may. You specifically recommended that, “A prudent financial management practice for recurring assistance payments. . . would be to avoid one time or pre-payments.” How has the government’s decision to do exactly the opposite affected managing university assistance in the future?

MS. SHANNON MACDONALD: Well I guess – again, it’s the point in time with which we were speaking so at the point in time we were saying this practice isn’t appropriate. If I go on to, I guess, make a comment on what they’ve done, I’m out of the scope of our report. The point we were making around the pattern of payments is, when you have annual recurring payments, you should keep it consistent.

We would prefer that the prepayment not have happened. I think what they’ve done – and again I’m out of the scope of the report so I’m interpreting a bit . . .

MR. GLAVINE: Yes, I appreciate that.

MS. SHANNON MACDONALD: . . . is that they’ve maintained the new pattern. I would like to see them go back to the old way of doing it but we’ve pointed out to them that when they do that, there’s going to be come complexities around that. So at what point in time they do that, I don’t know and I’m not subject to advise them on when to do that. But I will say that they will have a two-year financial management issue as they bring it back into alignment.

MR. GLAVINE: Yes, I appreciate that comment and it’s related to both the previous and the question you just answered because you did state that once such a pattern is broken, new financial planning is required to resume the recurring expenditure in a multi-year forecast. How does the NDP’s decision then to prepay the assistance for 2010-11, and it was

done in 2009-10 budget year, how will it affect future forecasts which you did prepare in Phase 1?

MS. SHANNON MACDONALD: Again, I’m not at all privy to when or if they would plan to revert back to paying the university payments in the year that they’re meant to be, so I’m speculating because I have no idea when that would happen. If you were to do projections for the next four to six years, let’s say, and there was a point in time when there was an expectation that pattern would go back to old, you would have a two-year adjustment.

We did a diagram of what that would have looked like if it had happened this year, which was a surplus in one year and deficit in the next as you come back into line with that payment pattern. At some point, they will have to plan in their projection for a two-year fluctuation as that comes back into line, if they were to pick a point in time when that would get adjusted.

MR. GLAVINE: Also in Phase 1, you talked about the offshore offset revenues. How does the NDP’s decision to remove the requirement to recover deficits in subsequent fiscal years affect the budget forecast, which you also presented in Phase 1? Legislation was passed which said we would not, as a province, be required to have balanced budgets, nor recovery of those monies as a requirement as well. How does that impact, again, where the direction of your report felt that the province should be going?

MS. SHANNON MACDONALD: Those items would fall in the area of financial management concerns. Again, we looked at financial management and accounting recommendations, so those things weren’t relevant to accounting. Accounting is fine, you can have a surplus or a deficit. What the province was trying to do was not incur any deficits and not add to the net direct debt with any deficits, so any time you had a deficit you have to repay it and it was really to respect the levels of the net direct debt.

Our recommendation around that was, you’re in the middle of some very significant financial management challenges – beyond this legislation, you are in a critical point. The current legislation was actually creating more difficulty if you were having to balance and repay outstanding deficits and whatnot. While they were very prudent when they were established, we were in a bit of a new normal. Our advice was to look at those again and whatever their conclusion would be about them was up to them, but we did feel that they were a bit encumbering considering the new normal, which was a not very pleasant financial outlook for the next four to five years.

MADAM CHAIRMAN: Mr. Hogg.

MR. HOGG: I just refer you to Page 9 of the report. That provides a projection on an accounting basis. Then later on in the report on Page 19, that takes the accounting projection and adds to it the legislative requirements that you mentioned, the recovery of deficits and

the offshore offset. So there are two layers of projections – the accounting projections and then the legislative projections after that.

MADAM CHAIRMAN: Just a few seconds.

MR. GLAVINE: Just to finish on this note in terms of the offset revenues and in terms of making projections, do you think government now has moved into a whole new way of dealing and moving away from past processes and in an area where they may encounter some extreme challenges based on decisions made this year?

MR. LEONARD PREYRA: Madam Chairman, on a point of order. That question goes into government policy now. The review itself looked at the government position at the time previous to August, so I would say that question should be rephrased to look at the report itself.

MADAM CHAIRMAN: Thank you, Mr. Preyra. The time has actually elapsed for the Liberal caucus, so perhaps Mr. Glavine will rephrase that and come back in the next round.

We now turn for the next 20 minutes to the Progressive Conservative caucus. Mr. Clarke who has joined us.

HON. CECIL CLARKE: Thank you very much, Madam Chairman. I want to welcome our guests here today. Just to get right to the questioning, with this audit that then became phrased as a financial review, but it was an audit by all public terms. What the public expected because of the political commitments made by the NDP, I suggest and would think that after they got in there and their enthusiasm, the Auditor General and officials might have identified the actual appropriate processes of the language necessary of who is the auditor of the province versus others that might provide advice or an opinion from outside. However, the public see this as an audit and it was promised as an audit to the people of Nova Scotia.

As a result of that – and I know in your answers to these questions that you had great co-operation from all the officials, Treasury and Policy Board, the Department of Finance, departments. In your dealings with them have you ever found that things were out of sync with GAAP and/or the way the reporting should have been with the books when you took a look?

MS. SHANNON MACDONALD: No, we had no issue with GAAP or accounting policies as all. Anytime we refer to it in our report, it is generally, continued to comply with GAAP or continued to do the right thing. So the accounting and the books – as I said, we had full co-operation and a lot of that has to do with the fact that it’s a strong team and they had all the information.

MR. CLARKE: So when you looked at that information – because part of the inference as we were going forward was that the books of Nova Scotia were being cooked by the previous government – is it your understanding that the books were cooked in Nova Scotia when you received the data?

MS. SHANNON MACDONALD: No.

MR. CLARKE: Okay because I do know that people were suggesting that there was something great and erroneous. I do recognize, and as you’ve referenced with regard to the period we find ourselves in, where we were going. If you can just explain to me, when you were given those parameters it was almost like there were blinders put on, you couldn’t go left or right with regard to an accounting opinion that professionals might look at, offer any advice. Is that clear that you were told, stay within these things, take the projections as they are?

MS. SHANNON MACDONALD: Not quite. We were asked to look at specific items and we had free rein to analyze them to our professional interpretation. Where some of the language confusion came around was absolutely with the use of the term audit. I think whether it was us or the Auditor General, there was clarity from the accounting profession to say there was no way this can be an audit. It shouldn’t be because you have an Auditor General, but it can’t be also because the type of work we would do would be significantly different. So we were doing an analysis as opposed to a verification, sometimes those words might be easier to use.

[9:30 a.m.]

In that analysis, we were asked to look at – the list that I mentioned at the very beginning of specific things – offshore revenue, look at economic projections, look at expense projections and on and on. In our report we brought them sort of all together so that you could see the combined impact of all of them. So to answer your question, to some extent we were limited in a scope because there was only so much time and money and so please look at this, which we did. I wouldn’t say though that the scope was so narrow because we were on so many different financial aspects that we really ended up spanning a good berth of it. So, that kind of is the answer to your question. I don’t know, Bill, if you can add better terminology?

MR. HOGG: I think in Phase 1, the requirements were very directive, so there’s a specific purpose and scope of what we were doing. In Phase 2, part of the scope was any other financial matter which came to the attention of the reviewer. It wasn’t our intent to go looking for items to analyze, other than what was in the request for work, but if it came to our attention and in this case in Phase 2, we did a little bit of work around expenditure management.

MR. CLARKE: So in undertaking what the public was identifying as the audit for this process, is there any information that came forward or you became aware of, or data that became disclosed that otherwise was not available to government and/or disclosed within government?

MR. HOGG: The analysis that we did was obviously not available to government. Some of the data was available but if we take revenue as an example, there were at least three projections of revenues, one of which we asked for specifically, based on changed economic assumptions. So that was new data that – some of it came in at the time, others came as a result of meetings that were held with economists. In general terms, there may have been a lot of data available but we started from a blank piece of paper, if you will, to build up the analysis based on data that was there, that we asked for or that we went out to discover.

MADAM CHAIRMAN: Ms. MacDonald, would you like to add to that?

MS. SHANNON MACDONALD: I’ll just add one thing, that in terms of availability of information there was always the projection of expenses and increasing expenses. The formal budgets referred to flattening expenses, under the assumptions that program spending could be curbed. So in the absence of specific plans to curb expense increases, our projection is the status quo budget.

The status quo budget existed. The budget that is published in the estimates is available as well. They are two different expense budgets, based on different assumptions. We felt that the one that was prepared by the departments that reflected budget increases was appropriate because there were no specific plans in place to curtail spending.

MR. CLARKE: So the information that you would receive, especially on the revenue side, would be information that has a point in time because things had shifted from the baseline of when this would have been started, as would have been the normal course. So over the course of the process of this audit, while projections would come in as a result of the impact as well of revenues associated with this global recession, that’s understandable.

I guess what I’m looking at – there’s no information that came to light to you that otherwise would not have been available to the Department of Finance, to Treasury and Policy Board, to government or to the Auditor General of the province that would have been brought to light or not disclosed at any other time?

MS. SHANNON MACDONALD: That’s fair to say.

MR. CLARKE: Part of the political exercise – and of course you’re doing an accounting one and I’m not questioning the integrity of the work or the quality of the work that was done. However, this was a political exercise because it was predicated on the basis that the books of Nova Scotia were cooked, that we’re going to get to the core of what the

problems were, that the sky had fallen and the phoenix rising from the ashes would have been Darrell Dexter and Co., to salvage the world and get things back on track and, indeed, put a new bridle on the horse to get Nova Scotia marching forward, if I were to understand the political exercise.

I will ask Mr. Hogg because coming back in a different light, Mr. Hogg, if I am not mistaken, you were part of Nova Scotia coming out of decades of deficit to a balanced budget process, correct?

MR. HOGG: I was there when we came up on a surplus, yes.

MR. CLARKE: Right, and kudos to you because – not to do that, but the reason being as part of that exercise, and as you would know on an annual budgeting process, the government would be presented with the financial scenarios and the choices they would have to make on expenditure and revenue to get to balance. Part of this exercise was, take the status quo, take any of the spending, the extraordinary revenue streams that come in and that is a consistent forward, if I am not mistaken in that review. On top of that, add the socialist NDP promises and factor those into that process and then come out and give us our projections. Is that correct – just take everything as it was.

MR. HOGG: Yes.

MR. CLARKE: However, in your experience in government in presenting data before government, is it not true that to get to balance you have many scenarios and government makes choices to get to that, and when there was a balanced scenario you probably had other alternatives that could have kept the province in deficit without making choices.

MR. HOGG: I’m not sure if I understand your question exactly but I think the key words are “status quo”. We weren’t asked for alternatives or options and part of determining what those options and alternatives are is first to determine where you are and where you might be in the future. Then you start looking at where things can be changed and what decisions can be taken. That obviously wasn’t part of what we were asked to do, it was just the first part of trying to set the stage of what the landscape might look like, without injecting anything other than the things that we’ve added in there.

MR. CLARKE: And that’s fair. When a government gets to a balanced scenario, I guess what I’m looking at is that you’re faced with choices and decisions. That’s the obligation and responsibility of governing and the burden that comes with it. When the books were finally balanced after decades of being in deficit, my question really, I guess, is government could have chosen to stay in deficit based upon projections other than tough choices to get them to balance.

MR. HOGG: Yes, obviously when you have a deficit there are difficult decisions that have to be made in order to reach a balanced financial position.

MR. CLARKE: So I guess, Madam Chairman, where I’m really going is that in fairness to the Deloitte team and their work, they were presented – as I say, the blinders were put on in terms of where they would have to be to maintain their numbers. But I also know, having been a person who was at the Cabinet Table in dealing with budgets, the department would present its scenarios, the Department of Finance, Treasury Board, all of the whole process. Every year, over the course of eight years of balanced budgets, we could have had a deficit. It was about the choices government would make to stay in balance and to put that in context with your revenue projections, whether they were mainstream or extraordinary, to maintain that balance to come into it.

So what we’re looking at is a report, I guess – and this is just the opinion piece – that was told to stay with all of the status quo, as was the phrasing, add in political promises and then come out with some statement of a structural deficit that will reach $1.13 billion if we’re going to go as though there was a catastrophe coming and not factoring in the types of choices and analysis and/or opinion. That’s where the challenge is with this because what I see is a government that undertook a political exercise, brought in very capable, competent expertise to work and have identified – we have very capable, competent people in the employ of the Province of Nova Scotia that the taxpayers are paying for. I believe it was $100,000 on the nose for this report, I believe – correct, $100,000?

MS. SHANNON MACDONALD: A couple of hundred dollars shy.

MR. CLARKE: Okay, approximately $100,000. The reality is what we’ve seen as far as the government, the numbers, the system, what I’ve heard is that there was nothing that didn’t apply to GAAP. There are political aspects, and as you refer, whether that’s the one-time payments to universities, all the things that a budget was voted down to stay in balance, then came in with great consternation and fanfare in bringing down a government but, at the same time, to do all the same things, and I would assume that they will take the same advice we did, to stay GAAP compliant, as the Auditor General and his team go in.

What I guess I’m looking at is specifically, to set the record straight, you had to take, as you say, just to be clear, the status quo numbers, the political promises, stay within those parameters, not offer any other advice, not be able to look at any changes in scenarios, other future forecasts, analyses that the department or Treasury Board would do, is that correct?

MS. SHANNON MACDONALD: Yes, that’s correct.

MADAM CHAIRMAN: Mr. Hogg.

MR. HOGG: Everything you said was correct although we did look at some expenditure projections within Treasury Board. That wouldn’t include new programs but they had some estimate of program changes and how that would affect the budget. But the general answer to your question is yes.

MR. CLARKE: Thank you very much. I think it’s very important, Madam Chairman, because a lot of the types of outflow of this report and subsequent spinning of it would suggest that this province was on a crash course, rather than a government that now has to make tough choices of their own and not the decisions of a past government. I’m glad that Deloitte is here today to be able to provide us an opportunity to – and I say set the record straight because we have not heard that from the government, we have not seen exactly – and when you’re on the outside of a government-initiated process, so be it, it is what it is, they set the terms of their own review.

I would say to our presenters today, are there any aspects of your review, was there anything that came to light that would have been new – and I know it was all GAAP compliant – were there significant or new matters that came to light where an opinion or advice, or government was provided feedback from Deloitte as a result of doing this exercise?

MADAM CHAIRMAN: Ms. MacDonald.

MS. SHANNON MACDONALD: Yes, we do have recommendations in both reports and we summarized the recommendations at the end of each one. We have recommendations, as I’ve mentioned, in both areas of accounting and financial management. As you’ve highlighted, the accounting ones are often just saying, continue on the good course that you’re on. There are financial management recommendations, so I’ll just flip to – in the Phase 1 report it’s Pages 21 and 22, where we have comments around what’s going to happen to net direct debt, what’s going to happen to expenditure forecasts, how quickly things will become in a deficit and the magnitude of the deficit.

Really, our recommendations are around impact and magnitude. We don’t get into the specifics of policy recommendations or program adjustments or anything like that. I think this sets the stage for subsequent policy considerations. Our recommendations are really around the fact that in order to manage the finances of government over a long term, there are some things that are going to have to be looked at, like the legislation, like spending levels, those sorts of things. Again, we do not provide opinion or judgment on what that should look like, which way they should go on those, but just highlighting they really needed to be addressed one way or another.

In the second report we talk about more specifics on Pages 25, 26 and 27. In there we’re looking at more process areas. So when you get down into very specific isolated processes, you may want to consider certain areas. So in the area of capital budgeting there

are some plan considerations there; also, government transfers, some revisiting of that from the first report; third-party revenues and some coordination there with the Auditor General’s Office; and the business plans, a bit more consistency and timeliness in those.

[9:45 a.m.]

So we do get into recommendations around improved processes, they are much more financial management related, so it would be better for certain departments, or transfer recipients would be better served by – those sorts of things in specific areas. There’s kind of a combination of two things, specific process things that might make things smoother and then the general, you need to address some policy issues; we’re not going to tell you what to do, but it would be in this area.

MADAM CHAIRMAN: You have two minutes.

MR. CLARKE: Two minutes. I’ll quickly just go with regard to the review as it comes to the prepayment of universities. For my benefit, if you can just highlight, what was your opinion or review with regard to the practice of a university prepay?

MS. SHANNON MACDONALD: University prepayment. Our view was that was an annual payment, so from a financial management perspective it’s an important annual expense that is best to keep on a recurring pattern. From an accounting perspective, there’s no reason you can’t change it. The nature of the payment is that once you write the cheque you’ve expensed it, and the government did that and that was fine. But from a financial management perspective, planning cash flows, planning for balanced budgets, once you change it you start to create surpluses and deficits that aren’t as a result of unusual spending, it comes from the timing of spending and that’s probably not prudent.

MR. CLARKE: I guess just quickly, because I know my time is wrapping up, so what we have is the government of day, today, that was campaigning against a prepay system, conducted this political audit process, you provided some advice, they ignored that and still went through with it and added a massive deficit this year. Is that correct?

MS. SHANNON MACDONALD: I’m not sure they ignored our advice because they may follow it at some point.

MR. CLARKE: In the future. But as of this current year, they ignored it.

MS. SHANNON MACDONALD: And I have no comment as to why they did that.

MR. CLARKE: But they did, correct?

MS. SHANNON MACDONALD: Yes.

MR. CLARKE: Thank you, Madam Chairman.

MADAM CHAIRMAN: The time has just elapsed for the Progressive Conservative caucus. The next 20 minutes are questions from the NDP caucus and we’ll begin with Ms. Zann.

MS. LENORE ZANN: Thank you and good morning. Thanks for being here. It’s interesting, I was here last week when we had the experts come in from across the country to tell us what Public Accounts Committees are for and they were saying they shouldn’t be partisan, so I’m going to try not to be partisan in my questions here.

First of all I do want to say, in my humble opinion, $100,000 to do a complete review of a province’s finances when a new government comes in, I would imagine that’s probably quite normal and wouldn’t exactly be on the expensive end of things to do such a complete review that was done. Would you say so?

MS. SHANNON MACDONALD: Yes, I would agree. The fee was low for that type of work and why we would engage in that was because we’re committed to the Government of Nova Scotia. We want to be involved, we want to help, so in relative terms to the scope of the work requested it is a very – I’ll use the term – reasonable fee.

MS. ZANN: Yes, I thought so. I’m not an expert, but that’s what I thought as a regular person here living in Nova Scotia. It is clear that the financial situation is worse than what was presented prior to the June election. What was the most surprising revelation during your review of the books that you found and how did you react when you realized how bad the financial situation of the province really was?

MS. SHANNON MACDONALD: In terms of surprise, I think when it all came together, on Page 10 of our report is a graph of the expenses and revenue together, so the trend of the two. Then there’s another graph where we demonstrate the impact of that combined with stimulus spending on the net direct debt. I think when those two graphs came together, those were two moments of aha for us, when we realized that you’re analyzing one area, you’re analyzing another area, you bring them all together and you realize that immediate action is needed to address these items. Do you use the term “perfect storm”, I don’t know if that’s a bit too extreme, but you just had multiple factors coming together to create a financial management issue. I wouldn’t say any one area created surprise, it was more the integration of them was perhaps somewhat surprising.

MS. ZANN: I had read somewhere that it was the structural deficit that seemed to surprise people, that they were surprised that the structural deficit was the way they found it. Could you explain that a little bit to me?

MS. SHANNON MACDONALD: The structural deficit would imply that it wasn’t something to do with cyclical trends, that there was something that existed in the regular spending pattern that needed to be adjusted. Structural deficits require much more significant change to address. When you have a large amount of structural deficit it’s a concern because it means that the remediation is going to take a lot more effort and planning. I just may ask Bill, too, do you have anything there that you wanted to add to that?

MR. HOGG: On Page 34 in the glossary there’s a definition – I should say a structural deficit is not a scientific term, it’s just a way of describing a situation. In the glossary, No. 6 tries to put the term “structural deficit” in an analogy to a household situation where you have a continuing level of expenses which your income can’t meet and that continues for an extended period of time, as opposed to a period of time where you may be unemployed and then that’s a cyclical deficit, if you will, which hopefully, when you’re re-employed, you may still have a structural deficit but it’s back to where it was before.

MS. ZANN: Then you can start paying it back again. I think a lot of people can relate to that these days, thank you. So it’s pretty clear to us now that in previous years the province’s expenses did grow steadily. I guess we’re told now that expenditure growth will surpass the province’s flat revenues. So this is, as you said, unsustainable but based on your findings, how much discrepancy did you uncover between the true state of the province’s finances and the picture that was given on May 4^th?

MS. SHANNON MACDONALD: There are two major differences. One was those revised economic projections that we mentioned were revisited in July, so that had a lot to do with new information – well, not new information but we all knew we were in a deficit, globally, and what’s the fallout of that on Nova Scotia, it was kind of just coming to bear through Canadian economic studies.

The other was the spending. What was published on May 4^th, and it’s disclosed in the estimates document, that there’s an assumption made when those estimates are made that spending will be kept to revenue, so you will, in fact, have a balanced budget in the out years. But that’s an assumption that isn’t the same as a status-quo assumption. A status quo assumption is you’ve been spending in the area of 6 per cent to 9 per cent increases for the past several years and there was no evidence that there were plans to change that spending level. So status quo was that there were no planned program changes, there were no planned staffing changing, there were no planned new revenue sources.

We took historic spending and created what we thought to be a conservative spending increase, which was 5 per cent to non-wage items, so 5 per cent on your professional expenses, supplies and the grants. Certainly in past years grants had been increasing at much higher than 5 per cent, so 5 per cent seemed reasonable.

When you put that into the projection formula, that’s when you see the expense level going up much higher. Again, it’s based on information that’s available in government departments, it’s there, but it was different from the May 4^th estimates, which had that assumption written into it that was not a status quo assumption but an assumption that expenses would be adjusted.

MS. ZANN: Great, thank you. We’re going to be sharing our 20 minutes here because there are quite a few of us now, so Mr. Preyra is next, I believe.

MADAM CHAIRMAN: Mr. Preyra.

MR. PREYRA: Thank you, Madam Chairman, and thank you very much for your presentation, it’s very illuminating to look at where we were before May and where we are now. I had a few questions relating to some of the previous questions that were asked. In your conclusions you said this report is not an audit, nor does it express accounting opinions. It’s pretty clear that you didn’t think it was an audit, the Auditor General didn’t think it was an audit, the profession doesn’t think it’s an audit but it’s a review, so it seems pretty clear there.

Let me get to the gist of some of those questions. Did you consider your review an independent review, in the sense that, were you given any instructions to inflate or deflate figures – cook the books, so to speak?

MS. SHANNON MACDONALD: Our report was absolutely independent. We wouldn’t engage in it if it wasn’t absolutely independent. We conducted this review on our terms and are quite comfortable to stand by that.

MR. PREYRA: In fact the previous government had contracted with you to do a number of reviews, all of which were considered independent by the government of the time and rigorous in your accounting profession and your integrity, your reputation rests on your capacity to do this kind of work independently, would that be fair?

MS. SHANNON MACDONALD: Absolutely, that’s the only way we’ll do it, that’s right.

MR. PREYRA: In terms of the instructions you received and the allegation that you were put within a very tight box, in your report you do paint a number of scenarios for the next five years or so and those scenarios talk about revenues and expenditures and what will happen if those scenarios are realized. Are there recommendations implied in those findings?

MS. SHANNON MACDONALD: Only the recommendations, I think, that we articulated from our perspective. Those were high-level recommendations that said from a

financial management perspective there were absolutely some major things that had to be looked at.

MR. PREYRA: So anyone looking at your graph on Page 10, for example, would be alarmed and would know exactly what you’re saying?

MS. SHANNON MACDONALD: Yes.

MR. PREYRA: I also have a question about what the new government knew and ought to have known in the pre-election period. Now, you talk about your updated expense forecasts and I understand you to be saying that those forecasts were based on information you were getting as you were conducting the review and from new consultations. Should the government have known that at the time?

MS. SHANNON MACDONALD: The expense forecasts in the reports provided to us were available, yes, any of those costs. We added some inflation estimates. If you look at the charts in detail you can tell which ones are numbers specifically provided to us and ones where we’ve had to make assumptions. For instance, there’s a chart that explains the expense increase has a provision for wage increases and process re engineering adjustments. That line came from government plans within. Where we’ve applied the 5 per cent inflationary increase to grants and supplies, that was something that we brought to the table.

MR. PREYRA: Thank you. When you say that departmental expenses used in the May 4^th estimates were not based on historical departmental spending patterns and, in fact, the updated expenses that you provided indicated more realistic expectation and you updated those expenses to $10.1 billion as opposed to $8.9 billion, is that the kind of information that you found in the course of your audit? Perhaps to be more generous, maybe they were things that happened in the interim intervening period but that was all new information at the time?

MS. SHANNON MACDONALD: Some of it’s new. It’s kind of how it all – I think in an earlier question I answered, saying the integration of all the information, that may have been somewhat new in terms of how all these numbers came together. The basis of the information is there. I don’t know if you could add clarity to that, Bill.

MR. HOGG: Giving a general answer based on my experience, governments tend to concentrate on the budget of the year, in this case the May 4^th budget or the one that came after. Although they are interested in future projections, other than a few people in government who spend their time doing it, there’s not a lot of emphasis and examination and analysis past the current year or to the next year. So there wasn’t a lot of information in those outer years, two, three and four years out; because of the uncertainty, people are reluctant to try to make an estimate.

[10:00 a.m.]

That’s what is a little bit different in what we were asked to do, it’s not a common – although they do make projections and I don’t want to be misinterpreted or misinterpret them – it’s not part of their specific focus. But we were asked to look at the next three years in some detail.

MR. PREYRA: Thank you. Just a question about the prepayment of university assistance. When you wrote your report you were looking at the commitment that was made by the previous government and that particular practice of prepaying to universities and its implications for financial management and accountability and essentially in your words, you say it should never have happened.

In your look at the books, that was a commitment that was made that you were looking at as to whether or not it was the right thing to do and whether it ought to have been done. You were not looking at a future government and the options that it should look at?

MS. SHANNON MACDONALD: That’s correct. As I mentioned earlier, what has happened subsequent to the report I really can’t comment on, I’d be speculating. We made a comment about the payment that was in that budget and we described what would be prudent financial management practices.

MR. PREYRA: But as you say it in your report it was a practice and it was a commitment that was made by the government at the time and whether or not that practice should continue is what you were commenting on at the time?

MS. SHANNON MACDONALD: Right.

MR. PREYRA: I have a question in general about the expenditures and revenues. In your conclusion, you say the resulting deficits are more complex than normal cyclical deficits and more complicated than typical structural deficits would suggest. Could you tell us what you mean by that just in layperson’s terms, in terms of where our revenues were and were projected to be and where our expenses were and projected to be?

MS. SHANNON MACDONALD: It was an interesting point in time to do the financial review because it was like a point in time when you could put your head up and say, where have we been, where are we going. It was a useful exercise for that purpose and it was good timing for various reasons and I think because of the reasons, hence the comment.

The reasons were that changes were happening in the economy which greatly impacts your revenue, so you had that to contend with, which on its own would have been a significant issue. The offshore revenue was coming to an end, that on its own is significant to deal with. You had spending patterns that were increasing and in terms of typical increases

for governments, they were high. The spending increases were in the 6 per cent to 9 per cent, which isn’t sustainable.

The reasons they were there are not for me to judge, there are program adjustments and whatnot. But when you have those sorts of increases, that pattern for any government can’t continue, so you have to look at that. You had stimulus spending that was coming along which impacts net direct debt. You were a government who had a history of very prudent legislative commitments, so wanting to not enter into deficits, commitments to repay deficits, commitments to manage debt levels which were going to be very difficult to continue, considering all of those other things.

So the heavy comment that you quoted really comes from the fact that any one of those would have been something a government would really have to dig its teeth into and address. You have six to 10 issues there that together make the issue large and that’s why it becomes complicated because you can’t just go to any one solution. You have to look at your sources of taxes, your other revenues, what’s happening with the federal government, what’s happening with the economy, what’s happening with programs, so it’s a multifaceted solution that’s required. Hence it’s structural, it’s cyclical, it’s both. It’s complex.

MR. PREYRA: Now the conclusion on both sides, on the revenue and the expenditure sides suggest that revenues were overstated and overestimated and expenditures were understated and underestimated. That was one of the reasons why there is such a significant difference between what was presented before the election and what was found in the review itself. Let me just – if I have a few minutes, Madam Chairman . . .

MADAM CHAIRMAN: You have a minute and a half.

MR. PREYRA: . . . ask about some specific questions. The report says, “We were not able to confirm the details of outstanding, unfulfilled, verifiable comments for capital spending and we have assumed all stimulus spending available has been committed.” Was there any logic, sequence or information bank that added together all of those stimulus promises that were made both in government statements and on the election platform itself?

MS. SHANNON MACDONALD: The government certainly has commitments. The problem that we got into that kept up from being more definitive there is that the difference between verbal promises and a pure accounting commitment – there’s different stages. In reality, a government goes through a non-accounting term of a commitment – there’s a few phases of a commitment before it’s a firmed up accounting commitment. When these capital items were firmly formalized as a commitment, they’re accounted for appropriately. What we couldn’t comment on is the documentation around those projects in those shades of grey, anywhere from a verbal commitment, even when they’re announced in the newspaper, things like that, those aren’t necessarily the trigger points for when it’s truly committed.

MADAM CHAIRMAN: Thank you, the time has elapsed now for that round of questions. For the last round we will have 14 minutes for each caucus beginning with the Liberal caucus and Mr. Glavine.

MR. GLAVINE: Thank you very much, Madam Chairman. Just a comment to start out with because it has taken about six, seven months for this evolution to occur. On tens of thousands of pieces of campaign literature and 400 to 500 media references that we were able to track, we heard that you were going to conduct an audit. Now we even hear from the NDP caucus this morning this massive conversion that has undergone and we now have had a review of the province’s financial state. So I’m very pleased that we have established that this morning.

I want to go back to the interim report regarding the offshore offset revenues. How does the NDP’s decision to remove the requirement to recover deficits in subsequent fiscal years affect the budget forecast which you presented in Phase 1 of the interim report? I think the projections, despite the liquidity of our current financial situation and so on, looked to be very reasonable. I’m just wondering how that will affect those forecasts that you presented? That was a legislative development that came about in September, early October of this year – not long after, in fact, you had done that first phase.

MS. SHANNON MACDONALD: Between Pages 9 and 19, we have the two impacts. If we go to Page 19 – I just don’t have the 2012-13 number in Page 19, I’m just realizing. For example, $1 million deficit, which was the one leading to the $1.3 million deficit in 2012-13, that often got picked up by the press. That annual deficit, as it climbed, related to the activity in the year, so the revenue and expense in the year did not relate to the implications of the financial acts. So on Page 19, we show the additional impact of that. If you were going to comply with the balanced budget legislation, instead of a $1 million deficit in 2011-13, that would have increased to $1.3 million in that year. The numbers that got the most attention didn’t consider the repayments, so the repayments would have exacerbated the problem.

MR. GLAVINE: Thank you. Specifically on Page 8, the interim report states, “. . .the amount of offshore offset revenues to be recognized in 2011-2012 is particularly high as lower levels of actual offset revenues in prior years must be ‘caught up’ to capture the remainder, or balance, of the $830 million by Year 8.” The $298 million in 2011-12, which couldn’t be counted against the balanced budget, now can be. How will this affect the budget projections?

MS. SHANNON MACDONALD: How will this affect the budget projections going forward?

MR. GLAVINE: Yes.

MS. SHANNON MACDONALD: I’m going to have to get Bill to answer that one; he’s the pro on this.

MADAM CHAIRMAN: Mr. Hogg.

MR. HOGG: If you’d turn to Page 7, there’s a very messy graph there but it’s an attempt to show the various requirements and the differences between the expectation of what the offshore offset was going to be and what it actually turned out to be. In the first four years, the offshore offset, if it was calculated, would actually have been much higher than what was required by legislation.

In contrast, after 2008-09, it was projected to be the reverse. Also, up until 2008-09, there were surpluses which helped cover the requirements in the legislation. After 2008- 09, it didn’t appear that those surpluses would continue. The expectation, when the legislation was prepared, is that offshore revenues would slowly slope up.

What actually happened is in the appendix, it went up and then quite a drop. As a result, to recover the full $830 million, there’s a large amount at the end of the period that the legislation and the agreement cover. So it’s the difference between the expectation of a

sloping upward of revenues from the offshore as opposed to what actually happened where they peaked and then dropped down. So there was a very good fortune in the early years but if you look on Page 24, you can see the extremely rapid ramp-up and then the decline, primarily due to natural gas prices.

MR. GLAVINE: Thank you. With all of the changes – legislative and otherwise – since the NDP has taken power, how accurate is the $13.469 million net direct debt total for 2012-13? I consider that relevant as we see policies and so forth to potentially keep it at that level or it could go even higher. So are those projections really thrown off by the legislation which, of course, you had no knowledge of that was coming during your period of review. So does that now make some of the projections really not in the ballpark?

[10:15 a.m.]

MR. PREYRA: Madam Chairman, on a point of order. The question asks the witnesses to talk about what the government has done since the report was written and to express an opinion on that. They are not in a position to make that assessment of government policy. They conducted a review of a specific period in time and made projections based on the data they had at the time, so I would say that question is inappropriate.

MADAM CHAIRMAN: I believe, if I’m not mistaken, that that figure is in the report; the $13.469 that was referred to. I think that the consultants who are before us have certainly knowledge of the figures and the assumptions and the revenue and expenditures,

so it would be fair to say that that was a reasonable, I guess, projection. I’d like to hear the answer on that; I don’t think it is policy-related. Yes, Mr. Porter.

MR. CHUCK PORTER: Madam Chairman, I would also add, I agree with your comments but we have to also remember that the taxpayer of Nova Scotia paid this very qualified team to offer an opinion and is being asked here quite appropriately. That should be remembered as well when we are – we’re not looking for tomorrow, we’re still looking back from today. Today is January, we’re looking from here today, backwards. That is part of the mandate of this committee. Thank you.

MADAM CHAIRMAN: Mr. Preyra, did you have something to add to that?

MR. PREYRA: Yes, Madam Chairman. Deloitte reported in August and that was the data they had at the time.

MADAM CHAIRMAN: Well as chairman, I think it’s my call to say we can have an answer on this and also that this report was a look at where the province is going and it was a projection as well about where we’re going. There were many assumptions made and we’ve been clear that those assumptions can change and so on but I would like to hear the answer to the question. So if we haven’t forgotten the question?

MS. SHANNON MACDONALD: That’s what I was just going to say, I hope I’m answering the question when I do answer it.

MADAM CHAIRMAN: I’ll turn it to you, Ms. MacDonald.

MS. SHANNON MACDONALD: Just to clarify, we are not privy to how government decisions have transpired. Any decision they’ve made that has been published in this year’s estimate, I don’t know if there’s a multi-year plan, I just have no access to that. The only thing we would be able to comment on is what we read in the paper subsequent to this report because we’re privy to all of the information while we’re part of the review and in a signed agreement with government, when that signed agreement is done, we’re out until the next agreement hopefully would come along. So our comment is somewhat subjective and based on observation, again, considering we’re just reading the paper at this point but I may pass it over to Bill just for a possible interpretation.

MADAM CHAIRMAN: Mr. Hogg.

MR. HOGG: I think that describes the situation fairly well. The only thing that we are aware of is how universities are funded and that doesn’t change the projection. It only changes the timing within that period of when that would occur.

MR. GLAVINE: Thank you. Just to go back – I want to be really clear on this – when the numbers were calculated at the time of your report and that was only a short time after the budget of May 4^th was brought in by the previous government, was the province in the position of surplus, balance, or deficit?

MADAM CHAIRMAN: Mr. Hogg.

MR. HOGG: I don’t recall, actually. I just have to find what was reported at the time.

MR. GLAVINE: So shortly afterwards, you were taking a look, getting as accurate and updated a look at the books of the province. When you were doing your work in July, primarily, was the province in a position of surplus, balance, or deficit?

MR. HOGG: I don’t know that I can easily answer the question because normally when you determine whether you are in surplus or deficit, it’s what has actually happened. So as of March 31, 2009, I really don’t recall what the number was. I think it was a surplus, but I don’t recall. I think what you’re asking is, did the budget project a surplus or deficit? I think it did project a surplus at the time, but I’m sorry, I just don’t have that kind of information.

MR. GLAVINE: It did project a very small surplus at the time, but I was wonder, in other words, did things dramatically change and shift from the preparation of February and March, April into May? Was there something dramatically changed in the subsequent months to when you were doing your work?

I ask that question because as I looked at the current Fall budget, there’s probably about $475 million of expenditures there that were not part of the provincial deficit when you were doing your work. I’m wondering if that, in fact, is an accurate picture, that the deficit of the province, when you were doing your work in July, definitely was nowhere near this $591 million that we currently have in this fiscal year? That’s a relevant and important question for Nova Scotians to know.

MADAM CHAIRMAN: Ms. MacDonald.

MS. SHANNON MACDONALD: Our revised numbers came up with a deficit of $51 million and there were changes that happened, for example, from the May 4^th surplus of $4 million to our deficit of $51 million, to the actual deficit of $500-plus million. So there absolutely were changes along the way. The changes to the $51 million would have been more about realistic expense projections and an impact on revenue. I think further, there was further impact on revenue after that. There was also no consideration on our part that the universities would be prepaid again, which they were. So, again, I’m out of scope of what we looked at because we didn’t look at the actual tabled budget, but I do know that decisions

were made subsequent to our review outside of our scope that impacted why the deficit ended up being $500-plus million.

MADAM CHAIRMAN: The time has elapsed for that round of questioning. I’m going to turn the floor over to Mr. Porter from the Progressive Conservative caucus for 14 minutes.

MR. PORTER: Thank you, Madam Chairman, and I thank both of you for being with us today, lots of information to dig out. I also want to comment, as Mr. Glavine did somewhat, with regard to perception. I’m fairly busy in my constituency. I meet with folks in coffee shops regularly, I meet with folks in their homes, seniors in nursing homes, municipal councils, you name it, and this has been quite a topic of debate. In every single example this was seen, and perceived at least, as an audit. If you asked what’s being done, the word “audit” was used. I just wanted to be clear today that the average Nova Scotian out there, at least where I come from, sees this exercise as an audit to look back to see what the previous government was doing wrong, because that’s how it was portrayed – a lot of politics being played here, there’s no question.

The other piece that really got under the skin, I guess is a good way to put it, of the people in this province was the fact – and no disrespect to either one of you because you do fine work and we recognize that – that we were paying $100,000 to have an audit done when we have qualified, more than qualified, very good staff working within the Department of Finance and so on in the province, so it was not looked on favourably. Perhaps you’ve heard that and seen that and read that, as well, in the media by Nova Scotians as a whole – where I come from at least, and I represent rural Nova Scotia as you know. They say that again, here we are, we’re already in a deficit, what are we doing spending another $100,000 – again, not to take away from the credible work that you’ve done and I appreciate that very much and thank you for it. I wanted to get that piece out there because that is right from the people of this province and I think it’s important that it’s brought up here today as well.

But it has brought to light a number of things and one of the questions asked of me at the time was, what are Deloitte& Touche doing that the folks that we, as taxpayers, are paying for in government aren’t doing? So if you want to just clarify for the record the difference that you did – I know it’s independent, but maybe some of the key points that you would do that our department folks would not?

MADAM CHAIRMAN: Ms. MacDonald.

MS. SHANNON MACDONALD: Sure, thank you very much. Absolutely we brought a different, independent view. We brought perhaps some external perspectives. Certainly from a skill-set perspective, it could have been performed by the Auditor General’s Office as a special assignment. It’s not part of the typical audit process.

The type of work we did would not be considered typical audit work, so if we were to audit the province we wouldn’t have necessarily engaged in any of these studies. The audit looks very much at the past year, so what actually transpired. We were in what I would consider more of a financial advisory role, looking at financial management considerations, doing financial analysis, looking at historic trends and future projections. That gets into a very different realm of thinking and scope than you would do in an audit. So an audit verifies things of the past, this was really around cash flows, legislative implications, decisions that needed to be made and it resulted in some good financial management discussion that said, in light of these situations that are happening, that are converging at this time, as a government you have financial decisions you have to make.

An audit in the sense of a typical annual audit might not necessarily engage management and an auditor in that conversation, so this was specifically targeted at those sorts of financial management considerations and it led us to those higher-level discussions and just provided background and support for the government to make financial decisions. We weren’t making the decisions for them, we basically engaged in conversation around these numbers that allowed them to think through what they would now do with that.

MR. PORTER: Thank you for that clarity. That will be very useful in the days and weeks ahead, as I’m now able to go back to these folks with the Hansard of this and say listen, this is what this was about and here are some of the things that were done. Those historical trends are important, I hear you say that, as well, because part of the question that my colleague asked with regard to the books, were they cooked or weren’t they, your answer was no, that clearly over the years when you look at those historical trends things seem to be on par for revenues, expenses and so on.

We all know that we went to an election last year based on our proposed budget being shot down at the time and the way with which we proposed bringing the books in line and balanced once again. A lot has changed, no question with the economy and things like that over the last number of months since that time in May.

Is it fair to say, in coming back after that election, regardless of who came back, because we went to that election that we were automatically in a deficit position? I just want to reference, in May we made one presentation of what was – and you came in in July, I believe it was, so in a very short time frame there was a window of a minimal surplus already to a $50-plus million deficit. So where were we immediately following the election by way of a deficit? The election having been called has had an impact obviously in creating that deficit. Is that fair to assume?

MS. SHANNON MACDONALD: Immediately following the election, whoever was in power was going to have to address the economic assumptions that they had changed, the need for specific initiatives to be in place to address the spending trends.

Spending trends in government can’t be changed on a dime, it absolutely takes leeway to address them. So if the $51 million was coming from some spending levels that needed to be curbed, those had to be addressed immediately. Again, the economic assumptions, as we had mentioned, we had asked for revised ones because things were changing rapidly at that time. So that $51 million was there. Maybe I’ll ask Bill to just fill in a little bit more.

MR. HOGG: The major thing that occurred between the May 4^th budget and at the time we were doing our work was the changes in revenues. The Department of Finance does their revenue projections based on economic indicators but also statistics. Take an example of gasoline that’s used or cigarettes that are sold and they estimate HST and those taxes going forward. When that information becomes available from the various statistical agencies, they plug it into their formula and out comes the revenue.

On Page 10, the red line is – well, it’s declining and part of that change was very rapid and happened just around the time we were doing our work.

[10:30 a.m.]

MR. PORTER: Thank you. And just to be clear on that then, so revenue changes, not mismanagement changes. Is that clear to say?

MS. SHANNON MACDONALD: The revenue piece was economically related.

MR. PORTER: So if I were to ask you then . . .

MS. SHANNON MACDONALD: Well, sorry, I should modify that.

MR. PORTER: Go ahead.

MS. SHANNON MACDONALD: There was the offshore revenue expiration plus the economics. So the economics we couldn’t have planned for. Had we planned for the drop-off in the expiration of offshore revenue, that was going to require those expenditure adjustments that I mentioned that weren’t yet in place. So they needed to be put in place right away for them to be realized in that current year. Not that that’s mismanagement but that has to be addressed in the current year.

The economics, it’s not mismanagement, it happens to everybody. So the first one being economics, everyone adjusts to it as it comes. The second one being offshore revenue, we knew that was coming. When that was going to be adjusted or how, I’m not able to comment on, but as a manager of finances we’d know that’s coming.

MR. PORTER: Okay, I know my time is running short – I have five minutes, okay, thanks. So on that and having said all that and not knowing what the future was going to bring with regard to those two points and you looked at the historical trends in your review, then what was being presented, in your opinion, would you state that the province was living outside of its means in the projections that were put forward in May?

MS. SHANNON MACDONALD: Because the May 4^th estimates provided for a balanced budget, the answer to that would be no. However, what was going to change to make that happen wasn’t in place yet, so we had not gotten to a point of living outside of our means, but the management engine that needed to get us within our means absolutely needed to come into play immediately.

MR. PORTER: Thank you, that’s a very good point. What is the cost to the Province of Nova Scotia now that we’re in a deficit position of where we are, $500 million, $600 million? We’ve paid the $300-plus million on the university prepayment that we’ve talked about. What’s the long-term cost to Nova Scotians in being in deficit for a year, two years, whatever it might be? Any idea just as accounting folks, or can you comment on that?

MS. SHANNON MACDONALD: I don’t know the answer to that question.

MR. PORTER: The federal government announced in late December that Nova Scotia was going to get an additional $250 million in federal equalization dollars, yet the Minister of Finance in this province says we will actually see closer to $80 million and the $250 million figure is misleading. Can you comment on how there can be such a discrepancy on that?

MS. SHANNON MACDONALD: I can’t comment on that. Bill, do you have a view on that?

MR. HOGG: No, I haven’t kept up on those announcements. I can only point to Page 26 of the report where it shows the equalization dropping off, and the little bit I understand is that the federal government was trying to ease that decline. But the numbers, I don’t have any information on that.

MR. PORTER: All of the work that you’ve done – a substantial amount of work, two reports, numerous recommendations – the government will obviously follow some perhaps, or have not followed others. I’m kind of curious, do you think that you’ll be called back? Has there been any mention of you ever being called back in the future to look at where we are, say, next year? After having come in right after the election of a new government – again, the political piece here was blaming the previous government for being on unsustainable paths and not managing the province’s finances appropriately, although we’ve determined today that was not the case. Any idea whether you’ll be back or not? Has that been brought up or brought to your attention, requested?

MS. SHANNON MACDONALD: No, I’ve not been requested to come back, it has not been brought to my attention that there would be any specific project related to that. I’d be happy to at any time, but there has been nothing brought to my attention.

MR. PORTER: Thank you. How much time do I have left, Madam Chairman?

MADAM CHAIRMAN: You have almost two minutes.

MR. PORTER: Thank you very much. I just had a couple of questions here that I had noted down. What was the total time frame for the report? How long did it actually take you to do, start to finish – both phases?

MS. SHANNON MACDONALD: We were right on time. We were given some quite tight time frames in the RFP document, so the request was for us to have progress reports on July 17^th, 24^th, 31^st and get the interim report in on August 7^th, and we did that. So that was sort of a five-week time frame to get that interim report in. We then worked on the second report from the end of August through to the end of October by the time we finally tabled that one. So that would have been a two-month time frame to do that second piece of work, so it was a little less intense. The first piece that we did in five weeks was much more intense; the second piece was spread over eight weeks – and I mean less intense in that the hours in each day were smaller.

MR. PORTER: So you had some pretty dire warnings with the release of the second part of the report. The previous government was sounding some warning bells early last year. At some point you must have read our quarterly financial update to see where we were?

MS. SHANNON MACDONALD: Yes.

MR. PORTER: How did that reflect your report?

MS. SHANNON MACDONALD: So you’re saying subsequent to the release of our report?

MR. PORTER: Yes, looking back.

MS. SHANNON MACDONALD: I’m not sure we can comment because, again, we’re privy to so much information when we’re in an engagement with you and then we’re not when we’re not. Why any decision was made that makes it $50 million versus $500 million, we would reserve any comment on that because there are many discussions that happen after we leave the room.

MR. PORTER: Sure, I appreciate it. Thank you very much.

MADAM CHAIRMAN: Thank you. The time has elapsed. I’d like to turn the floor over to Ms. Birdsall and the NDP caucus.

MS. PAM BIRDSALL: Thank you very much. This is indeed a complex issue and although we’re tackling a number of questions over and over it seems, each time you answer something that sounds similar, more clarity seems to come forward. This financial review that you put together really does seem to be such an essential thing for us, giving us really deep analysis of financial management for the government and this kind of information obviously was vital to be able to make plans for the future.

It’s also clear that Nova Scotia faces many tough decisions. As your report says, not only does this government have to tackle cost pressures, but all Canadian governments have to do the same thing. But ours faces the expiry of short-term resources that Nova Scotia has depended upon, such as the offshore. So to expand a bit on Mr. Preyra’s question, given the fact that the world economic recession has created what you’re calling a new normal, which is a tricky new normal and based on your findings, given the previous government was made aware that short- and medium-term revenues such as offshore were coming to an end, would you say that sufficient planning was put into their program management, given the fact that those resources were dwindling?

MS. SHANNON MACDONALD: I guess the only thing I can comment related to that is, in order to balance the budgets in the way that they were published, we could not see the evidence of the program changes planned to accomplish that.

MS. BIRDSALL: So given that, had the previous government remained in power, how do you see the province’s finances in three years, given the trajectory they were on?

MS. SHANNON MACDONALD: Regardless of who was in power, there was going to have to be a look at those trends. Again, a solution to those trends is any number of things, sorry, a solution to the change in the trends is any number of things. Certainly, things like debt servicing costs, pension evaluation adjustments, the fact that spending in departments had been escalating at 6 per cent to 9 per cent in the past and that couldn’t be sustained, any government in power was going to have to look at that.

MS. BIRDSALL: Thank you. I’ll share my time with Mr. Whynott.

MADAM CHAIRMAN: Mr. Whynott.

MR. MAT WHYNOTT: Thank you, Madam Chairman and thank you, obviously, for coming today. This process is an important process in our democracy. Obviously, with this report this puts a lens on the previous government’s books and also the realities of going forward here after the election and as a new government was coming in. Coming out and seeing the report, we realized that the previous government was on an unsustainable path and

doing nothing was not an option. Even yourself, today, said that immediate action was needed, so obviously there were significant challenges in the short term, medium term and long term. For the people that I represent, and I would most comfortably say for my colleagues – for all Nova Scotians, these challenges are real and these challenges are what this government is willing to meet.

I want to go back also to examples of what colleagues in the other caucuses were saying about using an institution like yourself to do reviews. Previous governments in the past have used them, they’ve used them as far as the Corpus Sanchez report goes, they go as far as using Deloitte as an example of the eResults that came out a couple of years ago, as well as the jail system. So there are examples previous governments have used to do that.

Going to the report, quite frankly, did you inflate any of the numbers in your review?

MS. SHANNON MACDONALD: No, we would not inflate numbers. We substantiated them and made sure there was support for numbers that we were comfortable putting in the report.

MR. WHYNOTT: Can you comment a little bit on the past government’s use of offshore revenues to pay for programs?

MS. SHANNON MACDONALD: The only comment I would make is if you look at the trends in revenues for the past few years and the trends in expenses for the past few years, the table we have on Page 10 shows from 2005-06 to basically 2008-09 – well actually I’ll say 2007-08, that revenue was on a very significant increase. So revenue increases were there that not every government gets the pleasure of every year. Typical revenue expenses are closer related to inflation in the 2 per cent to 3 per cent range, as opposed to what you were experiencing in the 8 per cent and 9 per cent range.

If you look at the expense line, it’s kept just under the revenue line, so there were surpluses each year, this is true, but spending was happening at the same rate as those revenue increases. So I think the spending followed the revenue, that’s clear in those charts, so you just need to recognize that those revenue increases aren’t typical for government and aren’t sustainable so therefore the spending could never have been continued either. That part of it, regardless of the economic flat line that happens in that chart – so you go from the nice steady increase to a flat line – without the economic crisis, you would have had the high increase and then a sort of sloped 2 per cent to 3 per cent increase. That was coming, regardless.

MR. WHYNOTT: Okay, so as we all know, our offshore is a non-renewable resource – of course, it’s a finite projection, right? This money will eventually dry up. Again it goes back to the previous government paying for programs. Can you comment on that a little bit?

MS. SHANNON MACDONALD: Well if your program spending is on recurring programs that are committed for out years, you have a problem, and I won’t comment on if this money was spent on recurring programs but when you see that your revenue trend can’t be sustained, you have to make sure that your program increases aren’t intended to be sustained. So if you were on a recurring track and these things were committed to increase, there would be a problem. In some cases they could be one-time programs, they could be recurring programs, I really can’t comment on that.

MR. WHYNOTT: Is it fair to say that governments in the past have used offshore revenues as if they were a perpetual revenue source?

MS. SHANNON MACDONALD: I can’t comment on that, honestly, because it’s not clear what the plan would have been to curb program spending. You would have had to see those two lines change at the same pace and I didn’t see a plan for that to change so I’m not sure if I could comment. Do you have anything to add to that, Bill?

[10:45 a.m.]

MR. HOGG: There’s a graph on Page 24 and it shows that the royalties for a period of about five years were continuing at a very rapid pace but were becoming very reliable, in terms of a source of income. So there’s the temptation when you have that period of time, to rely on that, to count on that and to plan your spending around it. It’s not unlike if you were fortunate enough to have an employer who provides bonuses; if that continues over time, you rely on those. When they stop that program, you have to adjust and it comes as a bit of a shock.

MR. WHYNOTT: So would you say that – is it fair to say that the government’s use of offshore royalty revenues contributed greatly to the province’s structural deficit? I know you use that term – as you said, it is not a scientific term.

MS. SHANNON MACDONALD: Yes, it would contribute to it because with its absence, you then need to look at the program spending and make a significant change to adjust to that. So it would contribute. I guess it all depends on if you think structural is over a 10-year period or a one-year period, I suppose it is somewhat cyclical over a 10-year period so now I’m getting into the science of structural deficits but you could call it structural.

MR. WHYNOTT: The report talks about how much spending and how it grew steadily over the years – most people would say almost out of control. You mention the expenditure growth will surpass the province’s flat revenues, which obviously puts us, as a province, on an unsustainable path. What can you say about the less than realistic expense protections during the May 4^th budget?

MS. SHANNON MACDONALD: What can I say about the expense projections before the May 4^th . . .

MR. WHYNOTT: Yes, the May 4^th budget.

MS. SHANNON MACDONALD: Only that the expense projections were included under the assumption that there be a balanced budget. That’s fine if you then, in turn, have a plan for how you are going to adjust expenses to reach a balanced budget. That was the gap at that time, there weren’t the plans in place to change expenses to balance. That’s a lot to do with what Bill mentioned earlier around the focus on a current year budget versus a multi-year budget. So the May 4^th budget comes out very focused on the year in question but it does provide information in the out years.

The out year assumption around a balanced budget, what action was needed back inside government to realize that assumption wasn’t in place yet, would it have been in place? I can’t comment on that but it is an out year assumption that does require activity inside government to plan for.

MR. WHYNOTT: Two more minutes? I think I have one question here by my honourable friend from Pictou East.

MADAM CHAIRMAN: Mr. MacKinnon.

MR. CLARRIE MACKINNON: Thank you very much, I’ll have to be very brief here. I think it’s safe to say that the previous government had unique, short-term revenue sources that were, in fact, drying up. The writing was actually on the wall in 2007-08 and certainly it wasn’t factored in to the degree that it should have been and that resulted in looking at going on down that unsustainable path. Do you have any comment about that?

MS. SHANNON MACDONALD: I would agree with your comment that the revenue in the past few years had been a benefit, the revenue amounts. You are also right in that that trend was changing and it’s a new reality for sure.

MR. MACKINNON: So I think it’s safe to say that the new government is faced with the single largest financial management challenge of recent times and as we move forward, the next decade is going to be very difficult to deal with. The good times dried up and there wasn’t a realization that they were, in fact, drying up. I think that’s probably a fair comment to end with. Thank you.

MADAM CHAIRMAN: The time has actually elapsed for the questions. I don’t know that there was a question in that for you, anyway, but I will bring the round of questioning to a close with that. I’m not sure if you wanted to say a few words in closing but we’d certainly like you to have the opportunity, so Ms. MacDonald, if you’d like to say a few words to the committee.

MS. SHANNON MACDONALD: I’m very brief in my closing comments to just thank you very much for the opportunity to come here. It has been our pleasure to discuss this report in more detail and absolutely, there were some perceptions and myths and the word “audit” just kind of makes me squirm in my seat. I’m glad we’ve had a chance to talk about all that and I very much appreciate your candid questions.

I hope sincerely that we’ve been able to help all members of the Public Accounts Committee with the questions they had around this report and that we’ve been able to add some context around the point in time with which we were privy to government documents and able to provide our insights, our objective assessment and perhaps add an extra element of financial management discussion to government plans.

There are some challenging times ahead. I think everyone has a good handle on those and we’re pleased to have been part of the process. While the topic is not necessarily a positive one, we’ve certainly been pleased to provide the support that we’ve been able to along the way and happy to help at any time.

MADAM CHAIRMAN: Thank you very much. On behalf of the committee I would like to thank you for casting more depth in terms of our understanding of the report and allowing us to explore it further. I think it’s important that the Legislature be involved and have that opportunity to really understand the recommendations and the conclusions that you’ve drawn. So I do thank you today for coming and answering the questions so candidly.

We have a little bit of committee business to attend to, so you’re welcome to gather up your papers and leave. I have just a few minutes here with the committee; we have a couple of items relating to upcoming meetings.

The agenda shows that our next meeting is February 3^rd and that’s the date for the Auditor General’s Report to be presented. As we discussed last meeting we had to put it into one week rather than two because the Progressive Conservative caucus will be away on the January 27^th meeting, so we have no meeting scheduled for next week. The schedule at this point in time – and we’ll send it out to you again – one change we’ve made is that we’re going to adapt and have both sessions at the Legislature. Probably the first session will be in the Red Room where we’ll have the technology to have a presentation and PowerPoint from the Auditor General.

The plan is 8:30 a.m. to 9:00 a.m. with a quiet time for us to look at the report, then about a 45-minute session with the Auditor General, in camera, to explore some of the points that are raised. We’ll have a short break and then come into the Legislative Assembly here at 10:00 a.m. for a two-hour public meeting with questions for the Auditor General. So that’s as it is now and we’ll send the exact details. Mr. Preyra.

MR. PREYRA: Sorry, Madam Chairman, did you say that the first morning session would be in the Red Room?

MADAM CHAIRMAN: Yes, that’s the intent, although we’re going to speak to Legislative Television and the technicians to see what the best way is to do it. We did want to bring us into the same building. The original plan was we would meet at the Committees Office and as you can see with the weather today, we can have terrible weather and it might be difficult going back and forth, so we thought, let’s have it in the same building. So that’s the one change we’re looking at. We’ll send out those details to you in advance of the meeting, but that means no meeting next week and we will have the long meeting on February 3^rd. So I’m just bringing you up to date on that one.

The next meeting after that is scheduled for February 10^th and that’s actually – I think electronic health records is the subject that’s on. I would like to ask the committee if we could move that to February 17^th because the Liberal caucus is going to be out of town for the meeting of February 10^th. So with a motion, if I could, we’ll move that.

MR. PORTER: I so move.

MADAM CHAIRMAN: Would all those in favour of the motion please say Aye. Contrary minded, Nay.

The motion is carried.

Thank you very much to committee members. That is our practice to allow a break when there’s an out-of-town caucus. So that means we’re only scheduled for one meeting after February 3^rd and my concern is that our Subcommittee on Agenda and Procedures should meet in the meantime to set some further subjects. We were going to meet today, but Mr. Preyra has asked that we not meet until we hear from the Auditor General and look at that report. I understand that, but I’m hoping we can set perhaps a different day.

One suggestion is we can meet on February 3^rd after the meeting, but I think that’s going to be a long morning already. Perhaps the members of the subcommittee could agree to meet on another day so that we don’t wait until February 17^th. Once we meet and discuss some other subjects we need the full committee to endorse those new agenda items. I guess I’m looking to Mr. Preyra, he’s our vice-chairman. Could we have a meeting in between, not on a Wednesday perhaps, but in between and after February 3^rd?

MR. PREYRA: Certainly our main point is we’re very interested in seeing what the Auditor General has to say, it will be a fairly comprehensive report that reviews a number of government departments. We want to have a look at that, and traditionally Public Accounts Committees, including this one, have drawn a lot of their subsequent agenda from the Auditor General’s Report. Our point is we want to have a chance to look at the report before we meet so that we can set the agenda. When we meet is less important than the fact that we meet after the Auditor General’s Report and after we’ve had a chance to look at it.

MADAM CHAIRMAN: What is your preference? Do you want to set extra time at the end of that three-hour session we’re having on February 3^rd, or would you like to meet on another day?

MR. PREYRA: I think we had originally thought about February 10^th and I’m assuming the whole day is now out.

MADAM CHAIRMAN: Yes, I’ll be out of town.

MR. PREYRA: There’s nothing that’s written in stone that says we have to meet on that particular date, but certainly enough time to look at the Auditor General’s Report.

MADAM CHAIRMAN: Well, perhaps you’d let me send out some suggested dates and the three members of that committee could agree to meet outside of a Wednesday, after Public Accounts.

MR. PREYRA: Yes, certainly.

MADAM CHAIRMAN: The reason it’s important is after having talked to our clerk, Darlene Henry, she says it takes two to three weeks to line up somebody, a new witness, and to get packages of information out to us. So I feel, as chairman, it’s really important that we continue to meet on a very regular basis and I don’t like to have too many gaps in that. As it stands now, if we don’t get this endorsed until the 17^th, we’re in a little bit of trouble there. Anyway, we can have that discussion at the Subcommittee on Agenda and Procedures.

I’d also like to suggest that we talk about the session we had last week, that was the session with the CCAF on best practices for Public Accounts Committees. My hope is that perhaps all three caucuses could look at what we heard and come back with some suggestions and perhaps recommendations of things that we might like to – just even a few steps that we might like to take that we could adopt here in Nova Scotia. I’d like to put that on the agenda, as well, for the subcommittee and perhaps you’d like to talk to your caucuses about that.

With that, I would like to call the meeting, I guess, to adjourn and a motion to do so.

MR. PORTER: So moved.

MADAM CHAIRMAN: Thank you very much, we are adjourned.

[The committee adjourned at 10:58 a.m.]