REPORT OF THE AUDITOR GENERAL OF QUÉBEC TO THE NATIONAL ASSEMBLY FOR AUDIT OF FINANCIAL INFORMATION AND OTHER RELATED WORK

Transcription

1 REPORT OF THE AUDITOR GENERAL OF QUÉBEC TO THE NATIONAL ASSEMBLY FOR AUDIT OF FINANCIAL INFORMATION AND OTHER RELATED WORK SLIDESHOW PRESENTED TO PARLIAMENTARIANS FEBRUARY 17, 2011

2 Table of Contents of the Report Message from the Auditor General Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Observations of the Auditor General, Mr. Renaud Lachance Government s Consolidated Financial Statements Restrictions and Comments in the Auditor s Report Audit of the Institutions of the Networks Development Accounting and Auditing Standards 2

3 Table of Contents of the Report (cont.) Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Stakes Related to the Indebtedness of Québec Public Sector Bill No. 128 and Growth of Program Expenditures Portrait of Management Reports Study Dealing with Actuarial Assumptions Financial Analysis of La Financière agricole du Québec 3

4 Table of Contents of the Presentation Slides Message from the Auditor General 5 to 7 Study Dealing with the Actuarial Assumptions of Pension or Insurance Plans 8 to 52 Program Expenditures and Consolidated Expenditures 53 to 63 Stakes Related to the Indebtedness of Québec Public Sector 64 to 75 An Act to provide for a balanced budget in the public health and social services network 76 to 79 4

5 Message from the Auditor General

6 Message from the Auditor General The Auditor General Act stipulates that I can make the comments that I consider appropriate: on the financial statements of the government, public bodies, enterprises and entities of the networks as well as on the accounting policies or principles under which these statements have been prepared; on the form and content of financial information documents, notably estimates and Public Accounts, as a basis for supervision over the use of public funds and other public property. 6

7 Message from the Auditor General (cont.) Since taking up my duties, I have ascertained a keen interest on the part of parliamentarians for subjects of a financial nature, including: the compliance with the Balanced Budget Act; the financial position of public sector entities (example: Caisse de dépôt et placement du Québec (CDPQ)); the indebtedness of Québec public sector. Consequently, my objective is to: turn our expertise in this field to good account for parliamentarians; prepare a report in this field each year. 7

8 Study Dealing with the Actuarial Assumptions of Pension or Insurance Plans - CARRA - Government of Québec - FSST - FAAQ

9 Objective of the Study The objective of this study is to explain to parliamentarians: the nature of actuarial assumptions; their degree of sensitivity; their effects, notably on the valuation of liabilities (debt) disclosed in the financial statements. A firm of actuaries assisted us in our work. Par

10 Scope of the Study This study is based on the actuarial valuations used for the purposes of the financial statements: of four plans administered by CARRA as at December 31, 2009: regular service of RREGOP, regular service of PPMP, TPP and CSSP (actuarial valuations of 2005 tabled in December 2007); of the Government of Québec as at March 31, 2010 for these same plans (actuarial valuations of 2008 tabled in October 2010); of the FSST as at December 31, 2009 (actuarial valuation of 2009 tabled in March 2010); of the FAAQ as at December 31, 2009 (actuarial valuation of 2009 tabled in March 2010). Par. 9.22, 9.24; Chapter 9, Table 3 and Schedule 5 10

11 Chapter 9, Table 4 11

12 Main Stakes for the Selected Entities Par. 9.49, 9.51, 9.52; Chapter 9, Figure 2 12

13 Main Stakes for the Selected Entities (cont.) For the FSST, the FAAQ as well as for the plans administered by CARRA: a variation of the actuarial obligations can have an impact on the capitalization of the plan(s) and hence, ultimately, on their price determination. For the government: a variation of the actuarial obligations can have an impact on the expenses recorded in its financial statements, which would influence its financial equilibrium (surplus or deficit); a variation of the actuarial obligations can have an impact on its liabilities disclosed in the financial statements and its level of indebtedness. Par. 9.49,

14 Overview Actuarial assumptions deal with future events. According to actuarial standards: The best assumption is that known as "the best estimate". The "best estimate" concept means that the estimate is neither conservative nor unconservative and without bias. Several different estimates of the same assumption may be acceptable. Par. 9.1, 9.9, 9.20; Chapter 9, Table 1 14

15 Overview (cont.) The majority of actuarial assumptions can be classified in two main categories: economic assumptions; demographic assumptions. Par

16 Overview (cont.) Chapter 9, Table 2 16

17 Overview (cont.) For the 4 analyzed entities: all of the assumptions were determined on the basis of "the best estimate"; all of the assumptions currently chosen are situated within an accepted range; the expenses and actuarial liabilities were determined and disclosed correctly in their financial statements. Par. 9.20, 9.21,

18 Actuarial assumptions chosen for the purposes of our study Chapter 9, Table 7 18

19 Discount Rate Assumption The discount rate assumption is used to convert into "today s dollars" the future benefits to be paid. All of the analyzed entities use a discount rate established according to the nominal rate of return on assets intended for the payment of future benefits. The nominal rate of return is equivalent to the real rate of return to which is added, by taking into account a geometric progression, the inflation rate. Par. 9.60,

20 Discount Rate Assumption (cont.) Chapter 9, Table 20 20

21 Discount Rate Assumption (cont.) Impact of the choice of the discount rate The higher the rate, the more it reduces, "in today s dollars", the value of the actuarial obligation. Conversely, the lower the rate, the more it increases, "in today s dollars", the value of the actuarial obligation. (scenarios 1 and 3 of Table 6 on the next slide) Par. 9.67; Chapter 9, Table 6 21

22 Discount Rate Assumption (cont.) Chapter 9, Table 6 22

23 Inflation Rate Assumption Since 1991, the Bank of Canada aims to keep inflation at the target rate of 2%, namely the median point of the target range of 1 to 3%. This target, which has been renewed four times since 1991, is in effect up to the end of The four entities used different long-term inflation rate assumptions, but which all lie in the Bank of Canada s target range. Par. 9.77,

24 Inflation Rate Assumption (cont.) Chapter 9, Table 10 24

25 Inflation Rate Assumption FSST and FAAQ The FSST and the FAAQ pay benefits that are fully indexed to the cost of living. Consequently, a variation in the inflation rate assumption will have little impact on the determination of their actuarial obligation since it influences both the discount rate and indexation rate. However, when the inflation rate is known and when it differs from the actuarial assumption, a gain or loss known as the "experience gap" is created, which alters the results of these entities. Par. 9.79, 9.80,

26 Illustration of the "experience gap" Inflation Rate Assumption FSST and FAAQ (cont.) The indexation rate of the benefits of the FSST and the FAAQ in 2010 was 0.4%. This rate is equivalent to the inflation rate of the previous year. However, the actuarial assumptions chosen for 2010 were 3.4% for the FSST and 2% for the FAAQ. Consequently, respective experience gaps (gains) of $307 and $115 million were recorded in the financial statements of these entities in Par

27 Inflation Rate Assumption Government of Québec and CARRA Given the fact that the pension benefits ensuing from the plans studied are not fully indexed, a variation of the inflation rate assumption will have an impact on the value of the actuarial obligation. A reduction in the inflation rate would lower the discount rate and would increase the obligations "in today s dollars". Par. 9.83, 9.84; Chapter 9, Table 11 27

28 Real Rate of Return Assumption The real rate of return assumption is one of the most important assumptions for all of the entities examined because it influences the discount rate. It may be established by the sum of the best estimate of the real rate of return assumption for each asset category multiplied by the proportion of this category in the benchmark portfolio of the investment policy. Figure 4 (next slide) illustrates this notion. For the purposes of this illustration, we assumed an investment policy containing only three asset categories. Par

29 Real Rate of Return Assumption (cont.) Chapter 9, Figure 4 29

30 Each selected entity or plan adopted an investment policy for the funds deposited with the CDPQ. Their policy comprises: a target benchmark portfolio (which corresponds to the targeted percentage for holding an asset category in relation to the entire portfolio); the minimum and maximum limits in order to reflect the latitude given to the CDPQ. (see an example on the next slide) Real Rate of Return Assumption Investment Policy The real rate of return assumption is determined notably according to their respective investment policy. Par. 9.89,

31 Real Rate of Return Assumption Investment Policy (cont.) Chapter 9, Table 14 31

32 Real Rate of Return Assumption Investment Policy (cont.) An entity holding a large percentage of its investments in equity markets should, in theory, have a higher long-term real rate of return assumption. The same expectation exists for the "Other investments" category, as the risks associated with these investments are high. Conversely, an entity holding a large percentage of its investments in fixed income securities should, in theory, have a lower real rate of return assumption. Par

33 Real Rate of Return Assumption (cont.) Chapter 9, Table 15 33

34 Real Rate of Return Assumption (cont.) A few findings emerge from Table 15: The rates for fixed income securities are generally lower than the rates associated with investments in equity markets and other investments. For the same asset category, the rates established by each of the entities are different most of the time, even if all of the entities invest their assets with the CDPQ in identical asset categories. The assumption concerning the short-term fixed income securities of the FSST is negative. This is explained by the fact that the FSST believes that the nominal returns for these short-term securities will be less than inflation. Par. 9.97,

35 Real Rate of Return Assumption (cont.) How is it that for the same asset category the real rate of return assumptions are different? 1) The assumption was determined by different actuaries using different approaches. 2) The actuaries and the people who decide on the assumptions may have different visions of the behaviour of financial markets in the future. 3) A different investment horizon may occasionally explain these variations. 4) The time when the assumptions are made may explain the differences between the expected rates. Par. 9.98, 9.99, 9.100, 9.101,

36 Real Rate of Return Assumption (cont.) Chapter 9, Graph 1 36

37 Comparison of the Real Rate of Return Assumptions Table 13 presents the real rate of return assumption used by the entities examined. Table 17 (next slide) presents an analysis concerning their choice of assumptions in relation to their investment policy and their evaluation of the potential returns that these policies may generate. Par ; Chapter 9, Table 13 37

38 Comparison of the Real Rate of Return Assumptions(cont.) Chapter 9, Table 17 38

39 Comparison of the Real Rate of Return Assumptions (cont.) Under the "Rate used" columns of Table 17, we multiplied the breakdown of the target benchmark portfolio of the investment policy of each of the plans (Graph 1) by their own real rate of return assumption for each asset category (Table 15). Under the "Average rate" columns of Table 17, in order to make the data for an asset category comparable, we used the same real rate of return assumption by asset category for all of the plans, namely the average of the rates used by the four selected entities (Table 15). Par

40 Comparison of the Real Rate of Return Assumptions (cont.) For each entity, the percentages calculated in the "Theoretical real rate of return" row under the "Average rate" columns show the rates that would be obtained by using: the benchmark portfolio of their investment policy; an identical rate of return for the same asset category; a similar approach to evaluate the rate of return, namely without taking into account the estimated net management expenses which may be different from one entity to another. Par

41 Findings ensuing from Table 17: Comparison of the Real Rate of Return Assumptions (cont.) The real rate of return assumption of 3.75% used by the FAAQ is that which differs the most from the theoretical real rate of return of 5% based on its investment policy. Given the characteristics of their investment policy, the FSST and the FAAQ could have chosen a higher real rate of return assumption than the one currently used. The smaller the real rate of return, the lower the discount rate used to evaluate the actuarial obligation and hence the bigger this obligation is "in today s dollars". Par

42 Real Rate of Return Assumption (cont.) Chapter 9, Table 18 42

43 Discount Rate Assumption Particularity for the Government of Québec The discount rate assumption of 7.37% chosen by the Government of Québec is based on the nominal rate of return of assets intended for the payment of pension benefits. Other governments in Canada have made the same choice. Two other governments in Canada use, for some of their important pension plans, a discount rate assumption combining: a nominal rate of return assumption concerning the plan s assets for the capitalized portion of their obligations; an assumption based on the borrowing cost for the non-capitalized portion of their obligations. This borrowing cost is generally less than the nominal rate of return of the plan s assets. Par , 9.130,

44 Discount Rate Assumption Particularity for the Government of Québec (cont.) The accounting standards that govern the preparation of the government s financial statements do not stipulate the choice of the discount rate that must be used. Consequently, the two different approaches presented on the previous slide comply with GAAP. Par

45 "Net" Liability Regarding the Pension Plans of the Government of Québec Table 31 presents the "net" liability regarding the government s pension plans as at March 31, This table shows that the three types of non-amortized actuarial losses concerning the obligations and the assets of the RPSF totaled $14,192 million as at March 31, These losses will progressively be recorded in the government s expenses in the years to come. This deferral to future years complies with GAAP. Par , 9.170, 9.174; Chapter 9, Table 31 45

46 "Net" Liability Regarding the Pension Plans of the Government of Québec (cont.) Chapter 9, Table 31 46

47 Capitalization of the Plans FSST, FAAQ, CARRA The capitalization of a plan generally corresponds to the fact that an entity sets aside funds exclusively intended for the payment of benefits when they become payable. The level of capitalization may be calculated in different ways. For the purposes of our study and out of a concern for comparability, we used the market value of the assets as well as the obligations established for the purposes of the financial statements for all of the entities. A plan may be totally or partially capitalized. Par , 9.177, 9.183,

48 Capitalization of the Plans FSST, FAAQ, CARRA (cont.) Graph 2 (next slide) shows that the major losses of the CDPQ in 2008 have had a direct impact on the value of assets, which thus lowered the capitalization level of all of the plans. Par , 9.177,

49 Capitalization of the Plans FSST, FAAQ, CARRA (cont.) Chapter 9, Graph 2 49

50 Government s Assets Related to Pension Plans in Proportion of the Actuarial Obligations The Government of Québec is not generally required to capitalize the pension plans of its employees. However, it has set as an objective to accumulate in the RPSF sums equal to 70% of the actuarial obligations concerning its pension plans in Graph 3 shows the evolution of the market value of the RPSF and of other assets related to the pension plans of public and parapublic sector employees in proportion of the actuarial obligations over the last 5 years. This graph also shows the impact of the losses of the CDPQ in Par ,

51 Government s Assets Related to Pension Plans in Proportion of the Actuarial Obligations (cont.) Chapter 9, Graph 3 51

52 Conclusion The choice of actuarial assumptions is a major stake for pension and insurance plans. We congratulate the Government of Québec, which published for the first year, in , sensitivity analyses in its financial statements. We encourage the other government entities affected by the determination of actuarial assumptions to present such sensitivity analyses in their financial statements. Par ,

53 Program Expenditures and Consolidated Expenditures

54 Program Expenditures Only the expenditures of the Consolidated Revenue Fund are considered program expenditures. Indeed, program expenditures only include those made by departments and budget-funded bodies. Program expenditures therefore do not include: the expenditures of non-budget-funded bodies, including special funds, financed by their own revenues or not yet financed (example: the annual deficits of La Financière agricole du Québec are not included); the expenditures of government enterprises (example: the expenditures of the Société des alcools du Québec are not included). Par. 7.5, Schedule 1; Chapter 7, Table 3 54

55 Program Expenditures (cont.) Within the context of its budget, presented in March 2009, the government set program expenditure growth targets over 5 years in order to reach a balanced budget in These targets have been revised on 3 occasions since March 2009, namely at the time: of the economic update presented in October 2009; of the budget presented in March 2010; of the economic update presented in December Par. 7.21; Chapter 7, Table 3 55

56 Impact of the Creation of Funds on Program Expenditures The creation of two special funds, from the year beginning on April 1, 2010, has resulted in the fact that certain expenditures previously included in the program expenditures are no longer included. These funds are: the Road and Public Transit Infrastructure Fund (FORT); the Fund to Finance Health and Social Services Institutions (FINESSS). As a result, beginning in , the growth of program expenditures will no longer be comparable with that of previous years. Par. 7.6, 7.7, 7.10,

57 Impact of the Creation of Funds on Program Expenditures (cont.) The creation of the Agence du revenu du Québec will also have repercussions on the analysis of the growth of program expenditures since some of them, which used to be program expenditures, will no longer be program expenditures effective April 1, For the benefit of parliamentarians, we analyzed the real and anticipated evolution of program expenditures by taking into account the creation of FORT and FINESSS, but without taking into account the creation of the Agence du revenu, from the time of the budget up to , based on the latest information published by the Ministère des Finances. (see Table 4 on the following slide) Par. 7.12, 7.13, 7.25; Chapter 7, Table 4 57

58 Chapter 7, Table 4 58

59 Growth of Program Expenditures (cont.) Two findings emerge from the previous table: 1. The budget of March 2009 anticipated program expenditures of $319.5B for the 5 years of the plan to return to a balanced budget. They were established at $324.6B at the time of the economic update of December 2010, by considering the sums that will be henceforth included in FORT and FINESSS to make them comparable. The $5.2B increase for this 5-year period notably results: from the impact of the new actuarial valuations of the pension plans; from the increase of the sums paid to La Financière agricole du Québec; from the additional investments in the RENFORT program; from the increase of the allowance for doubtful accounts at Revenu Québec; from additional expenditures in health care institutions. Par. 7.26; Chapter 7, Table 4 59

60 Growth of Program Expenditures (cont.) Two findings (cont.): 2. At the time of the budget, the government estimated total program expenditures of $117.4B for the ($57.4B) and ($60.0B) fiscal years. The real program expenditures, of $58.5B in and $61.6B in , total a sum of $120.1B, namely $2.7B more than the estimate of March Par. 7.26; Chapter 7, Table 4 60

61 Program Expenditures and Consolidated Expenditures The budget documents published in March 2010 showed an estimated increase of 4.1% for all of the consolidated expenditures in , as compared to a program expenditure growth target of 2.9% for that same year. This situation is explained by a growth of the expenditures of non-budget-funded bodies that was greater than that of program expenditures (see the following slide). Par. 7.28,

62 Program Expenditures and Consolidated Expenditures (cont.) Chapter 7, Table 5 62

63 Program Expenditures and Consolidated Expenditures (cont.) Conclusion The government must make sure that its reporting allows parliamentarians: to evaluate the growth of program expenditures as was determined at the time of the taking into account of the commitments when the announcement of its action plan to return to a balanced budget was made in March 2009; to monitor the evolution of all consolidated expenditures, namely of all of the expenditures of the 500 entities included in its reporting entity. Par

64 Stakes Related to the Indebtedness of Québec Public Sector - Contractual obligations - Fiduciary operations - Régime de retraite du personnel des centres de la petite enfance

65 Stakes Related to the Indebtedness of Public Sector The stakes that we deal with in our report are: Contractual obligations These are financial commitments that appear in the notes and appendices of the government s consolidated financial statements and that, in accordance with GAAP, are not included in the debt. However, some of these commitments implicitly constitute a debt. Fiduciary operations These operations are excluded from the reporting entity for the benefit of beneficiaries and in their name. Régime de retraite du personnel des centres de la petite enfance Par. 6.4, 6.5,

66 Contractual Obligations The Government of Québec contracted obligations amounting to $34.7B as at March 31, 2010, namely an increase of $2.8B and of 8.8% compared with the year before. They represent 11.4% of the GDP. One also notes an increase of these obligations on the order of $12.4B in 3 years, namely since March 31, Par. 6.8,

67 Contractual Obligations (cont.) Chapter 6, Table 1 67

68 Contractual Obligations (cont.) Chapter 6, excerpt from Table 3 68

69 Contractual Obligations (cont.) The biggest increase of contractual obligations concerns the acquisitions of fixed assets and goods and services procurement contracts, which total $5.6B. A sum of $3.2B mainly concerns contracts related to the construction using the private-public partnership approach of Autoroute 25, Autoroute 30 and acoustic hall of the Orchestre symphonique de Montréal. As for the $2.9B increase related to the funding for the acquisition of fixed assets, $1.8B are attributable to municipalities and municipal bodies. Chapter 6, taken from Table 3 69

70 Fiduciary Operations In accordance with GAAP, fiduciary operations do not appear in the government s financial statements. However, the financial position of these trusts may influence the financial position of the government, either as: contributor (ASRA Fund); employer (FSST, FAP); user (FAAQ). Their position may also involve the government as the authority approving their price determination. Par. 6.23,

71 Fiduciary Operations (cont.) Chapter 6, Table 6 71

72 Fiduciary Operations Parental Insurance Fund (cont.) The QPIP is funded by contributions made by Québec workers and employers. The CGAP sets the annual contribution rates by a regulation submitted to government approval. The strategy of increasing contribution rates over several years has made it possible to limit the financial impact on contributors, but has resulted in an accumulated deficit of $464M as at December 31, Thus far, the price determination has been insufficient to cover the plan s costs. Par. 6.30,

73 Fiduciary Operations Parental Insurance Fund (cont.) The accumulated deficit excludes the future benefits to be paid. These sums appear in a note to the fund s financial statements. The plan will have to collect more than $1B from Québec workers and their employers to pay these sums. Taking the latter sums into consideration, to honor its commitments. Par. 6.33, 6.34, 6.36; Chapter 6, Table 7 73

74 Régime de retraite du personnel des centres de la petite enfance The current service contributions are funded in equal shares by employees and employers. The amortization payments aiming to finance the initial unfunded liability and any potential funding deficiency are paid solely by employers. Since the creation of the plan in 2003, the government has subsidized almost all of the contributions of employers, although the Act does not provide for any obligation in that respect. In accordance with GAAP, no financial information appears in the government s financial statements. Par. 6.38, 6.40,

75 Régime de retraite du personnel des centres de la petite enfance (cont.) Since the plan began, expenses on the order of $298M have been recorded in the government s accumulated deficits with respect to the subsidies paid. The actuarial valuation of December 31, 2009: shows a funding deficiency of $66.7M; estimates the total contributions of employers for 2010 at $61.2M, which represents a 19.3% increase in comparison with the contributions of Par. 6.42, 6.45, Table 9 75

76 An Act to provide for balanced budgets in the public health and social services network

77 An Act to provide for balanced budgets in the public health and social services network Since , the Act stipulates that a public institution of the HSSN must, on an annual basis, maintain a balance between its operating expenses and revenues. In , namely 10 years after the passage of the Act, onethird of the institutions is still in deficit and is thus in violation of the Act according to the calculations of the MSSS: 65 institutions in deficit $150M; 126 institutions in surplus $30M. Since , the MSSS has annually authorized "in-the-red" budget targets. In , an "in-the-red" budget target of $116M had been established; 69% of the deficits incurred had been authorized. Par , 4.3.4, 4.3.7,

78 An Act to provide for balanced budgets in the public health and social services network (cont.) Chapter 4, Graph 1 78

79 An Act to provide for balanced budgets in the public health and social services network (cont.) Certain causes may adversely affect compliance with the Act: insufficiency of the subsidies granted by the MSSS; authorization of "in-the-red" budget targets by the MSSS; inability of institutions to manage according to the budgets granted. Par