Chapter 2
Understanding the Finances of the Government

Table of Contents

Provincial Auditor Saskatchewan
1996 Fall Report

11

Executive Summary

In this Chapter, we recommend the Government provide the Assembly with a complete financial plan. Without a complete financial plan, Members of the Legislative Assembly (MLAs) and the public do not know the Government's planned total revenues, planned total expenses, and planned surplus or deficit. We think MLAs and the public need this information to understand and assess the Government's plans, priorities, and performance.

We recommend MLAs use the Government's summary financial statements as the key decision-making and accountability document. These statements show the total financial activities of the Government.

We recommend the Government publish an annual report in Volume 1 of the Public Accounts. The Government's annual report should include the Government's summary financial statements, the status of key financial and economic measures, its targets for each measure, and its thinking on the underlying financial and economic issues.

The General Revenue Fund's (GRF) statements can not be used to understand and assess the Government's overall financial activities because they report only part of the Government's activities. To end confusion between the GRF's financial statements and the Government's summary financial statements, we recommend the Government publish the GRF's statements in Volume 2 of the Public Accounts.

In addition to these recommendations, we present information for assessing the Government's financial condition in the context of sustainability, flexibility and vulnerability. We conclude the Government's financial condition has improved since 1993. However, the financial condition of the Government remains fragile.

We also present information for understanding and assessing the Government's revenues, expenses, and debts. From 1991 to 1996, the Government's total revenues grew at a faster rate than the Government's total expense. As a result, the annual deficit of $740 million in 1991 changed to an annual surplus of $572 million in 1996. In addition, while total Government debt decreased in 1996, pension liabilities are becoming a more significant component of the Government's total debt.

The Public Accounts need improvement

.03 The Government's 1996 Public Accounts consists of two Volumes. Volume 1 contains the General Revenue Fund's (GRF) financial statements and the Government's summary financial statements (SFS). Volume 2 contains the details of revenues and expenses of the GRF and other information.

.04 The Public Accounts state that the GRF and SFS are the main financial statements of the Government of Saskatchewan. In our view, the SFS should be the main financial statements of the Government of Saskatchewan. We think the Government should amend the Public Accounts to help MLAs, government officials and the public recognize the SFS as the key financial decision-making and accountability document.

.05 We continue to be concerned that MLAs, government officials and the public do not fully understand the nature of the GRF and the SFS. In the following paragraphs, we describe the nature of the GRF and the SFS. Also, we explain why readers should not use the GRF to understand and assess the financial activities of the Government.

.06 The Government's summary financial statements (SFS) report the financial results of all organizations the Government uses to provide goods and services to the public. The organizations include departments, boards and commissions, educational institutions, special purpose funds, and Crown corporations.

Provincial Auditor Saskatchewan
1996 Fall Report

13

Return to Top

.07 The SFS also provide important information in notes and schedules. In the notes, for example, the Government describes the status of its many pension plans. In the schedules, the Government provides a concise summary of its enterprise Crown corporations and describes its many large investments. Also in the schedules, the Government sets out its guarantees of others' debts.

.08 The SFS provide essential information for understanding the Government's finances and for assessing resource allocation alternatives and decisions. We encourage MLAs, government officials and the public to use the SFS as the key financial decision-making and accountability document.

.09 The General Revenue Fund (GRF) is a special purpose fund. The Government uses the GRF to pay part of the costs of certain services such as health, education and social services.

.10 The Government does not use the GRF to pay all the costs of all goods and services provided to the public. Accordingly, the financial statements of the GRF do not provide a complete accounting of government activities.

.11 The Government receives and spends significant amounts of public money outside the GRF. The Government provides almost 40% of all goods and services provided to the public through agencies outside the GRF, e.g., Saskatchewan Crop Insurance Corporation, Workers' Compensation Board, SaskPower and SaskEnergy.

.12 To some extent, the Government controls and decides the financial results of the GRF. Transfers from other government agencies affect the reported results of the GRF but do not create resources for the Government as a whole. The Government decides the amount and timing of these transfers.

.13 For example, when the Government records a transfer from the Liquor and Gaming Authority to the GRF, the GRF reports these transfers as revenue. In 1996, the Liquor and Gaming Authority earned $242 million (1995 - $222 million). However, in 1996, the Government recorded transfers of $290 million (1995 - $97 million) as revenue in the GRF.

 

Provincial Auditor Saskatchewan
1996 Fall Report

14

Return to Top

.14 As previously stated, these transfers do not create resources for the Government as a whole. The earnings of the Liquor and Gaming Authority are available for use by the Government whether or not the Government records a transfer to the GRF. Other transfers also take place.

.15 MLAs, government managers and the public should not use the GRF as the Government's key financial decision-making and accountability document because:

• the GRF reports only a part of the Government's total activity; and

• to some extent, the Government controls and decides the GRF's results by transfers to and from other government funds and agencies.

Simply stated, the GRF can not be used to understand and assess the Government's overall financial activities.

.16 The following graph shows the annual deficit or surplus reported in the GRF statements is significantly different than that reported in the Government's summary financial statements. For example, for the year ended March 31, 1996, the GRF incurred a deficit of $90 million (adjusted for unrecorded pension related costs of $108 million). However, the summary statements indicate that the Government had a surplus of $572 million.

 

Provincial Auditor Saskatchewan
1996 Fall Report

15

Return to Top

We recommend

.17 Members of the Legislative Assembly should use the Government's summary financial statements as the key decision-making and accountability document as these statements show the total financial activities of the Government.

.18 To assist MLAs and the public understand that the SFS are the key financial decision-making and accountability document, the Government should remove the GRF's financial statements from Volume 1 of the Public Accounts. Volume 1 of the Public Accounts should become the Government's annual report (see paragraph .27). The Government should include the GRF's statements in Volume 2 of the Public Accounts.

We recommend

.19 The Government should remove the General Revenue Fund's financial statements from Volume 1 of the Public Accounts and publish the General Revenue Fund's financial statements in Volume 2 of the Public Accounts.

 

A complete financial plan needed

.20 Unfortunately, the Government continues to use the GRF as the key financial decision-making and accountability document. The Government's annual plan contained in the Budget Address and the Estimates is based on the GRF. The Government's interim financial report called the Mid-year Financial Report is based on the GRF. In addition, The Balanced Budget Act (described as an Act to maintain financial stability and integrity in the administration of the finances of the Province of Saskatchewan) is based on the results of the GRF. As explained in the preceding paragraphs, the GRF's statements should not be used to understand and assess the Government's overall financial activities.

.21 Some believe that the Government's focus on the GRF is not misleading if the Government also publishes the SFS. We strongly disagree. For MLAs and the public to understand and debate the Government's overall plans and results, they need proper information. For that purpose, planning and performance information based on the GRF is incomplete and misleading.

We continue to recommend

.22 The Government should provide the Legislative Assembly with a complete plan (Budget) based on the financial activities reported in the Government's summary financial statements.

 

Provincial Auditor Saskatchewan
1996 Fall Report

16

Return to Top

.23 When the Government provides the Assembly with a complete plan, MLAs and the public would then know the Government's planned total revenues, planned total expenses, and planned surplus or deficit amounts. We think MLAs and the public need this information to understand and assess the Government's plans, priorities, and performance.

 

The Government should prepare an annual report

.24 In our 1994 Fall Report and our 1993 Annual Report to the Assembly, we examined what information MLAs and the public look for in annual reports to assess the performance of government organizations.

.25 We concluded that MLAs and the public look for information in annual reports to answer four questions:

• What the organization is all about?

• What the organization has done?

• Where the organization is now?

• What the organization plans to do?

.26 The Government's annual report should include financial information to help answer these questions. An annual report should be timely, and should set out and explain the Government's financial health in terms of financial results, trends and indicators, and in terms of the Government's thinking on key financial and economic issues.

We continue to recommend

.27 The Government should publish an annual report as soon as possible after March 31st of each year.

.28 Other governments, e.g., British Columbia, Alberta, and Canada, publish annual reports. Those reports include concise summaries of the state of finances of those governments. When deciding what information to include in an annual report, the Government could examine those reports.

Provincial Auditor Saskatchewan
1996 Fall Report

17

Return to Top

The Government's annual report should include key financial and economic measures

.29 An annual report should provide financial information to help MLAs, government officials and the public understand and assess the Government's state of finances.

.30 Currently, The Canadian Institute of Chartered Accountants is considering whether the state of finances of a government could be usefully monitored in the context of three concepts, i.e., sustainability, flexibility, and vulnerability.

Sustainability is the ability of a government to meet existing program commitments and its creditor requirements without increasing its accumulated deficit.

Flexibility is the degree to which a government can increase its financial resources to respond to rising commitments either by expanding its revenues or increasing its accumulated deficit.

Vulnerability is the degree to which a government becomes dependent and, thus, vulnerable to sources of funding outside of its control or influence.

.31 The following financial and economic measures could help MLAs, government officials and the public understand and assess sustainability, flexibility, and vulnerability:

• the Province's gross domestic product (GDP);

• the Government's accumulated deficit;

• the Government's annual surplus (deficit);

• accumulated deficit as a percentage of GDP;

• debt costs as a percentage of total revenues; and

• Federal government transfers as a percentage of the Government's total revenues.

.32 Each of these measures provide important signals about the Government's state of finances. Each measure can and should be analysed in more detail, combined with other information, and monitored over time.

Provincial Auditor Saskatchewan
1996 Fall Report

18

Return to Top

.33 An annual report by the Government would be a useful vehicle for the Government to set out these measures, its targets for each of these measures, and its thinking on the underlying financial and economic issues.

We continue to recommend

.34 The Government should include in its annual report the status of key financial and economic measures, its targets for each measure, and its thinking on the underlying financial and economic issues.

.35 The financial information in the Government's annual report should be based on the information provided in the Government's summary financial statements.

Information about the state of the Government's finances

.36 In the following paragraphs, we set out information related to the state of the Government's finances. The information is based on that provided in the Government's summary financial statements and by the Saskatchewan Bureau of Statistics. (Appendix VI contains a copy of the Government's 1996 audited statements).

.37 The Government's summary financial statements are first class. The information they include is very useful for identifying, analysing and monitoring trends in the state of the Government's finances. For this purpose, we show the total revenue and expense of the Government's general programs together with the totals for the Government's enterprises. Table 1 shows how we derived some of the information in this Chapter from the Government's summary financial statements. Table 2 at the end of this Chapter shows some key financial and economic measures.

.38 First, we present information for assessing the Government's financial condition in the context of sustainability, flexibility, and vulnerability. Then, we present information we think is useful for understanding and assessing the Government's revenues, expenses, and debts.

 

The Government's financial condition

.39 Sustainability. The ability of a government to meet existing program commitments and its creditor requirements without increasing its accumulated deficit is important when assessing a government's financial condition. The trend in the accumulated deficit as a percentage of the gross domestic product is key to assessing sustainability.

Provincial Auditor Saskatchewan
1996 Fall Report

19

Return to Top

.40 The gross domestic product (GDP) is the value of the goods and services produced in the Province in one year. When viewed together with other financial statement amounts, the size of the Government's financial requirements and activities can be better understood and assessed.

.41 The accumulated deficit is the amount governments have spent in excess of the revenues that governments have raised. This deficit is the sum of all annual deficits and surpluses and is the amount future generations of taxpayers and ratepayers are required to pay or finance.

.42 The following graph shows the trend in the accumulated deficit as a percentage of gross domestic product from 1991 to 1996. The upward trend from 1991 to 1993 suggests the Government's fiscal policies, i.e., policies relating to revenue raising, spending, and borrowing, would not be sustainable in the long run. Since 1993, the accumulated deficit as a percentage of GDP decreased. This happened because the economy grew and the accumulated deficit decreased. The downward trend suggests the Government will be better able to sustain its fiscal policies.

 

Provincial Auditor Saskatchewan
1996 Fall Report

20

Return to Top

.43 Flexibility. The degree to which a government can increase its financial resources to respond to rising commitments either by expanding its revenues or increasing its accumulated deficit is useful when assessing a government's financial condition. The trend in debt costs as a percentage of total revenues, sometimes called the Interest Bite is an indicator of flexibility.

.44 The following graph shows the trend in debt costs (interest) as a percentage of total revenues from 1991 to 1996. The upward trend from 1991 to 1993 means the Government was using more of its revenues to pay interest and had less revenues available for providing goods and services. Since 1993, debt costs as a percentage of total revenues is decreasing. The trend is encouraging since the Government has more of its revenues available for providing goods and services. Although, for the period presented, debt costs as a percentage of total revenues decreased, interest remains a significant expense. In 1996, debt costs were $1.65 billion.

 

.45 Vulnerability. The degree to which a government becomes dependent and, thus, vulnerable to sources of funding outside of its control or influence is helpful when assessing financial condition. The trend in Federal government transfers as a percentage of total revenues provides insights into vulnerability.

 

Provincial Auditor Saskatchewan
1996 Fall Report

21

Return to Top

.46 The following graph shows the trend in Federal government transfers as a percentage of total revenues from 1991 to 1996. The downward trend from 1991 to 1996 shows the Government is becoming less dependent, or less vulnerable to, sources of funding outside its control.

 

Conclusions on the Government's financial condition

.47 Since 1993, the trends in sustainability, flexibility, and vulnerability have improved. Therefore, the financial condition of the Government has improved. However, the financial condition of the Government is still, in an absolute sense, fragile. An accumulated deficit of nearly $10 billion or 39% of the provincial gross domestic product is the most obvious indicator of this fragility.

 

Revenue and expense trends

.48 We think the following information also helps readers understand and assess the Government's financial condition in terms of its revenue and expense trends. First, we compare changes in total government revenues, total government expenses, the consumer price index (CPI) and the Province's gross domestic product (GDP) from 1991 to 1996. Then, we compare changes in the revenues and expenses of the two components of Government, i.e., general programs and enterprises.

Provincial Auditor Saskatchewan
1996 Fall Report

22

Return to Top

.49 The following graph shows total revenues grew faster than the CPI. This means the Government's ability to meet program commitments and creditor requirements increased faster than consumer prices from 1991 to 1996. Also, total revenues grew slightly faster than the Province's GDP. This means the Government increased its revenues slightly faster than our provincial economy grew.

Total Revenue

Total Expense

CPI

GDP

.50 The difference between revenue and expense is the annual deficit or surplus. During the period, the Government's total revenue increased at a rate significantly greater than its total expense. As a result, the annual deficit of $740 million in 1991 changed to an annual surplus of $572 million in 1996.

.51 We present the Government's revenue and expense in terms of two components, i.e., general programs and enterprises.

.52 The general programs of the Government are carried out through government departments, e.g., education and health, and through organizations funded by government departments, e.g., regional colleges and district health boards. These programs are financed primarily by general revenues.

.53 The Government's enterprises are usually Crown corporations and include, e.g., SaskPower, SaskEnergy, SaskTel and the Liquor and Gaming Authority. These enterprises raise revenue through direct charges for goods and services. For enterprises, an increase in expenses is related to an increase in revenues because, to some extent, expenses are incurred to pay for the cost of the goods and services sold.

Provincial Auditor Saskatchewan
1996 Fall Report

23

Return to Top

.54 The following graph shows the changes in the components of total revenues and total expenses, i.e., general programs and enterprises during the period 1991 to 1996.

.55 From 1991 to 1996, general revenues, e.g., income taxes, sales taxes, and transfers from the Federal government, did not increase as much as enterprise revenues, e.g., energy and telephone utility fees, insurance, and liquor and gaming revenues. Also, general program expenses, e.g., agriculture, education, and health decreased during the period.

General programs		Enterprises
revenue	expense	revenue	expense

The components of the Government's liabilities (the debt)

.56 There are three general components of government debt, i.e., bonds and debentures, unfunded pensions, and other.

• Bonds and debentures are the amounts the Government borrows from external markets.

• The pension liability is the unfunded portion of the Government's pension obligation to its current and past employees.

• Other liabilities include trade accounts payable, accrued interest, unpaid claims of Saskatchewan Government Insurance and the Workers' Compensation Board.

Provincial Auditor Saskatchewan
1996 Fall Report

24

Return to Top

. 57 The following graph shows that the Government's total debt decreased in 1996 for the first time since 1991. Also, it shows that pension liabilities and other liabilities are becoming more significant components of the Government's total debt.

Legend
Other * top portion of bars	Pension liability * middle portion of bars	Bonds and debentures * bottom portion of bars

 

The Government's finances in more detail

.58 Table 1 shows the Government's revenues and expenses in more detail. The information is derived from the Government's summary financial statements. Appendix VI at the end of this Report contains a copy of the Government's 1996 audited statements. The unaudited information for 1991 is derived from an accounting prepared by the Government for the Financial Management Review Commission.

.59 Table 2 on page 28 shows a summary of key financial and economic measures we present in this Chapter.

Provincial Auditor Saskatchewan
1996 Fall Report

25

Return to Top

Provincial Auditor Saskatchewan 1996 Fall Report 26 Return to Top