1997 Annual Report

Preface

This document is presented as a summary of the Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1997. That Report contains approximately 300 pages of conclusions, commentary, recommendations and auditees’ comments. When readers identify a topic of interest, we encourage them to read the relevant section in the Report. This document contains information on the items reported in Chapters 1 through 4 and are numbered to coincide with the Report.

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Introduction

The Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1997 was prepared in compliance with Section 12 of the Auditor General Act. Section 12 requires that the Report outline significant matters noted during the course of examining the accounts of the Province, agencies of the Crown and other entities which, in our opinion, should be brought to the attention of the House of Assembly.

Comments on the audit of the financial statements of the Province are contained in a separate report entitled Report of the Auditor General to the House of Assembly on the Audit of the Financial Statements of the Province for the Year Ended 31 March 1997. Therefore, along with this Summary, two reports are tabled before the House of Assembly.

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Chapter 1

Auditor General’s Overview

This chapter provides an introduction to the Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1997.

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Chapter 2

Framework of Accountability

I again express concern over the lack of information being provided to the House of Assembly on Crown agencies which are funded primarily by the public purse. The House of Assembly, as part of the budgetary process, approves funding for these agencies and should receive information on how this funding was spent and what this funding has achieved. While considerable attention is given to the Government’s budget, there is a lack of emphasis on receiving and reviewing information on how agencies spent the monies which were approved during the budget process.

Our review of the 1996 annual reports tabled in the House of Assembly disclosed that only 7 entities receiving $157.9 million in Government funding had their reports tabled in the House of Assembly. There were no reports tabled in the House of Assembly for the remaining 78 entities which received $1.395 billion in Government funding.

In June 1997, the Minister of Finance and President of Treasury Board was directed, by Cabinet, to proceed with the implementation of a new authority and accountability framework for Government departments.

During the year, Government also established the Public Service Reform Initiative which focuses on organizational and structural issues which impact on how Government operates. One of the three Task Forces that were established as part of this process will focus on the development of an accountability framework for Crown agencies.

In addition, no action has been taken to establish a system of accountability over Memorial University of Newfoundland, which received $134 million in public funding for the year ended 31 March 1997.

We again recommend that the system of accountability over Government departments, agencies of the Crown and Memorial University of Newfoundland be strengthened.

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Chapter 3

3.1 Monitoring Agencies of the Crown

As at 31 March 1997 there were approximately 163 Crown agencies in the Province. Of these, 91 were required to prepare annual financial statements while 72 were considered non-financial and did not prepare financial statements. Any expenditures related to the operation of these 72 entities are included with those of the government department responsible for the entity and are audited annually as part of our audit of the public accounts of the Province.

Of the 91 entities required to prepare annual financial statements, 26 were audited by our Office while the remaining 65 were audited by private sector auditors.

Most of these entities do not have any requirement to report to the House of Assembly on the discharge of their responsibilities. As a result, a major role of the Office of the Auditor General is to monitor these entities in order to provide some accountability to the House of Assembly. Section 14 of the Auditor General Act requires all private sector auditing firms to submit to the Auditor General a copy of the audited financial statements and any management letters for all Crown agencies which they audit. These financial statements and management letters along with our audits of Crown agencies provide the basis for the monitoring of all Crown agencies. The results of our monitoring activities are outlined in Part 3.1 of the Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1997.

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3.2 Monitoring Expenditures of the Consolidated Revenue Fund

As part of our audit of the financial statements of the Consolidated Revenue Fund (CRF), we perform tests and reviews of the expenditures made by the various departments.

During the past year, we obtained expenditure information from Government’s accounting system relating to grants and subsidies, purchased services, and professional services. This information is provided in Part 3.2 of the Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1997.

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3.3 Special Warrants

The common parliamentary means of providing spending authority to government is through the annual passing of supply acts. This involves having the Members of the Legislature vote on the government’s funding requests. Approval by a majority of the Members of the House of Assembly is needed to pass an Act.

There are three types of supply acts which are usually approved by the Legislature each year. These are the main Supply Act, the Interim Supply Act and the Supplementary Supply Act.

Through the use of a “special warrant”, the government can authorize itself to spend public money without obtaining the prior approval of the Legislature. Section 28 of the Financial Administration Act outlines two instances where a special warrant can be approved and additional funding can be provided to Government if the expenditures are of an urgent and immediate nature.

There were seven special warrants totalling $75.7 million issued in the 1996-97 fiscal year, all of which were issued in March 1997.

Of the $75.7 million in special warrants issued in 1996 -97, $36.9 million were issued although it appears there was not an urgent requirement for the funding.

Expenditures authorized by special warrants will be recorded as expenditures in the financial statements of the Consolidated Revenue Fund in the same year that the warrant is issued. As a result, these expenditures will decrease surpluses or increase deficits of the Consolidated Revenue Fund in the year in which the warrant is issued.

Because special warrants authorize expenditures that impact the reported surplus or deficit in the financial statements of the Consolidated Revenue Fund, the issuance of special warrants should be in compliance with the Financial Administration Act.

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3.4 The Privatization of Newfoundland and Labrador Computer Services Limited

On 13 October 1994, Government announced the completion of negotiations for the sale of all the shares of Newfoundland and Labrador Computer Services Limited (NLCS) to NewTel Enterprises Limited (NewTel) and its consortium partners Bell SYGMA Inc. (Sygma) and Andersen Consulting (Andersen), representing 80%, 10% and 10% ownership respectively. NewTel and its consortium partners incorporated a new company called NewTel Information Solutions (NIS).

As a result of the privatization of Newfoundland and Labrador Computer Services Limited, Government entered into several legal agreements whereby the Province would receive the following:

$9 million for the shares of NLCS with the building remaining the property of Government;
$35 million in new information technology (IT) business to be brought to the Province over seven years by the partners purchasing NLCS ($15 million through NewTel, $12 million through Andersen, $ 5 million through Sygma, and $3 million in research and development to be contracted with NIS by Andersen);
the creation of 85 new jobs (20 by the third year of the agreement, an additional 40 by the end of the fifth year and another 25 by the end of the agreement) and an additional 27 person years of employment over the first three years of the agreement;
from the new company, NIS, a commitment to subcontract $9 million in Government work and an additional $12.2 million in non-Government work over the term of the agreements, to 31 March 2002; and
$587,000 annual building lease rental upon Government’s completion of an approximate $2.1 million building expansion project.

In addition, the Share Purchase Agreement entitles the Government to have a representative on the Board of Directors of NIS during the term of the Service Level Agreement which covers the period from September 20, 1994 to March 31, 2002.

For their part, Government and Memorial University of Newfoundland have contracted with NIS to purchase a minimum of $17.5 million annually in IT services during the term of the Service Level Agreement.

During 1997 we completed a follow up review of the privatization of NLCS. Our review indicated the following.

In accordance with the Industrial Benefits Agreement, NIS is required to submit to Government an Annual Report on the progress being made with respect to the commitments of each party under the Agreement to determine whether Government has received the benefits it negotiated in 1994. At the time of our review Government had received three reports.

Government has not verified the information contained in the annual reports provided by NIS relating to the progress on the commitments of each party under the Industrial Benefits Agreement. As a result, Government has not determined whether it is receiving the benefits it negotiated under the Agreement in the 1994 privatization of NLCS.

The annual Industrial Benefits Agreement reports provided by NIS, although not verified by Government, indicated the following issues:

- Andersen has not provided any of its $3 million commitment to establish a research and development centre within NIS by 13 October 1997, including the creation of 27 person years of employment in the first three years of the Agreement.
- Sygma has only achieved approximately $1 million of its required $2.4 million commitment to bring new business into this Province by 31 March 1997.
- The reports do not provide any information to indicate whether Andersen and Sygma are using NIS as their exclusive representative in the Province and preferred representative in Atlantic Canada as required by the Industrial Benefits Agreement.

For the year ended 31 March 1997, Treasury Board Secretariat indicated that Government did not provide NIS with the $17.5 million in revenue as required under the Service Level Agreement. Under the Agreement, failure by Government to provide the $17.5 million in revenue to NIS in 1996-97 allows NIS to reduce its subcontracting requirements under the Industrial Benefits Agreement of $2.8 million in 1996-97 by the amount of the shortfall in the revenue commitment. Also, NIS’s commitment to maintain existing employment levels and establish new jobs as outlined in the Industrial Benefits Agreement shall cease. NIS has not used the remedies which are available to it under the Service Level Agreement.

Although the Share Purchase Agreement entitles the Government to have a representative on the Board of Directors of NIS, Government has not had a representative appointed to the Board since the fall of 1996.

Our review indicated that the provisions of the remaining agreements have been complied with:

- Share Purchase Agreement;
- Pension Agreement;
- Software Trust Agreement; and
- Building Lease Agreement.

The initial rates charged by NIS for services allows Government to purchase, in the fiscal year ended 31 March 1996, the equivalent quantity of services provided in the fiscal year ended 31 March 1994 for approximately the same total cost on an annualized basis.

Under the Service Level Agreement, NIS is required to maintain service levels comparable to those provided by NLCS at the time of privatization. An independent evaluation of the Mainframe Computing portion of these services, covering the period from August 1994 to May 1995, was completed by a consultant in December 1995. The consultant reported that the service provided by NIS did meet the requirements of the Agreement. Government has not verified the service levels reported by NIS since the period covered by the consultant’s report. However, Treasury Board Secretariat officials indicated that they have not received any complaints from Government IT administrators regarding service levels provided by NIS.

One of Government’s objectives of the 1994 privatization of NLCS was to stimulate growth in innovative technologies and information industries in the Province. Government has identified performance indicators to measure growth in the IT industry in the Province since 1994; however, information on these performance indicators has not yet been gathered.

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3.5 Newfoundland and Labrador Teachers’ Association Group Insurance Plan

The Newfoundland and Labrador Teachers’ Association (NLTA) offers a Group Insurance Plan for all its members and those who are retired. There are about 9,500 active teachers and retirees participating in this Plan. The NLTA has appointed a Board of Trustees to administer the Plan. The Board, in turn, has entered into an agreement with an independent third party administrator to act as broker, administrator and consultant for the Group Insurance Plan.

In accordance with the NLTA Provincial Collective Agreement, the Province funds the premiums relating to group health, group life, dependent life, and mandatory accidental death and dismemberment insurance on a 50/50 cost-shared basis with teachers and retirees. The annual payments for these premiums as at 31 August 1995 was $6.3 million with Government’s share being approximately $3.1 million. The Collective Agreement dated 27 June 1994 defines the premium approval process and outlines the process to be followed in the event of a dispute between Government and the NLTA.

The most recently available financial statements of the NLTA Insurance Fund obtained by Government were for the year ended 31 August 1996. These financial statements indicated that the Plan had a surplus of approximately $5.3 million at that time. Since both Government and teachers fund the Plan, the $5.3 million surplus arose from those contributions. Officials at Treasury Board Secretariat indicated that, in their opinion, approximately $3.0 million of the surplus is attributable to excess Government contributions and as such should be refunded to Government. However, Government does not have an agreement in place with the NLTA as to the ownership and disposition of refunds, surpluses and deficits.

The Collective Agreement provides Government with an option to request arbitration if there is a disagreement on the reasonableness of the premium rates. Government, however, has not attempted to recover the estimated $3 million surplus through this process.

Although Government has received audited financial statements from the NLTA Insurance Fund, the financial statements do not segregate the financial position and results of operation of the provincially funded plans from other activities of the NLTA Insurance Fund. Government does receive annual financial information on the programs which it cost shares; however, it is not audited.

Government contributes its portion of the insurance premium to an independent third party administrator. This administrator deducts an administration fee and submits a net premium amount to the Insurer. Government, however, does not receive any reports to show what is included in the administration fee.

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3.6 Compensation Practices

Minute of Council 94-0520, dated 2 June 1996, directed that Treasury Board “…advise all boards, agencies and commissions, etc., that compliance in all respects with compensation standards which have been established for Government departments is mandatory.” It is clear that Government wanted to ensure that no public sector entity was providing compensation over and above that which had been established for Government departments.

Treasury Board, however, did not advise the boards, agencies and commissions, etc., that compliance with Government’s compensation standards is mandatory. The result of Treasury Board not informing the entities was clearly evident during our review of Crown-controlled corporations and agencies of the Crown since the issuance of Minute of Council 94-0520. Our reviews have indicated numerous incidents where the entities provided compensation to employees that was not consistent with the compensation standards established for government departments. In all instances, the entities indicated that they were never informed of the requirement to comply with Government’s compensation standards.

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3.7 Backup and Disaster Recovery Procedures for Government Microcomputer Systems

The use of microcomputer hardware and software in Government departments has increased in past years. Most departments of Government have installed local area networks (LAN) that have become critical to day-to-day operations. Employees use the LAN daily for purposes such as word processing, financial analysis and communication by electronic mail. Many departments also have purchased or developed microcomputer systems which reside on departmental LANs, or stand alone machines, that are used to deliver Government programs. The loss or unavailability of microcomputer systems could result in either a cost to reconstruct programs and data, delays in delivery of programs and/or loss of prestige and embarrassment to Government.

Microcomputer hardware and software systems can fail. Threats to continuity of system operations include, for example, unforeseen mechanical or electronic failure and the introduction of computer viruses. Disruption to operations and Government programs can be minimized when systems fail, by ensuring adequate backup copies of programs and data are maintained and a disaster recovery plan exists to enable staff to perform a controlled and orderly recovery of the system to normal operations.

Treasury Board Secretariat is responsible for preparation and maintenance of Government’s information technology policies. These are documented in the Government of Newfoundland and Labrador Management Manual which was approved by Government in 1985. The Manual states that “The operation of information systems has become critical factor in the operation of government services. It is essential to ensure continuous services, or the prompt resumption of services in the event of system failure.” Furthermore, the Manual assigns responsibility to departments for ensuring that backup and recovery procedures are in place.

Many Government departments are not complying with Government’s information technology policies and procedures. Specifically:

Departments are not carrying out risk assessments for their computer programs and data to identify critical systems and to determine the extent of backup and recovery procedures necessary to protect continuity of Government’s computer system dependent operations.
Most departments have not developed adequate backup and recovery procedures to be used to recover from any destruction or corruption of programs and data.
Many departments have not developed disaster recovery plans to guide them to a planned and orderly return to normal operations in a timely and orderly manner in the event they lose their current programs and data.

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3.8 Accounts and Loans Receivable in Government

Our previous reports to the House of Assembly have indicated that Government’s systems for recording, reporting and controlling accounts receivable did not always provide timely and accurate information to users. As a result, Government did not know how much money was owed to it at any given point in time. The general exception was the amount owed as of 31 March of each year which was determined subsequent to year end in order to prepare the financial statements of the Province.

Government anticipates that this problem will be addressed with the implementation of its new accounting system, which is presently in the development stage.

Our review of Government departments also indicated that a significant portion of their accounts receivable were in arrears and that their cash management program, which includes the collection of these accounts, was not adequate.

We reviewed the amounts owing to Government as at 31 March 1997 to determine whether they are collected on a timely basis.

Our review indicated that, in addition to not collecting amounts owed to it on a timely basis, Government has written off significant amounts owed to it. The systems in place to record, monitor, control and collect amounts owed to Government are not adequate.

Our review also disclosed that at 31 March 1997 the Consolidated Revenue Fund had total receivables of $474.8 of which $215.2 was considered to be uncollectible. In addition, during the period 1993 to 1997, Government has written off $190.3 million in accounts receivables, $16.5 million in tax remission and $9.1 million in tax forgiveness.

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3.9 Atlantic Lottery Corporation

The Atlantic Lottery Corporation Inc. (ALC) was incorporated in 1976 under the Canada Business Corporations Act, and is jointly and equally owned by the four Atlantic Provinces. It is a public sector entity that is extensively and directly involved in the management of a variety of lottery and gaming activities on behalf of the Atlantic Provinces.

During 1994 and 1995, the Auditors General of Nova Scotia and New Brunswick, under their respective legislative audit mandates, had attempted, unsuccessfully, to gain full and direct access to ALC for audit purposes. However, on 15 December 1995, the Nova Scotia Gaming Corporation, in its capacity as the Nova Scotia shareholder for ALC, requested the Auditor General of Nova Scotia to “perform an audit of the operations of the Atlantic Lottery Corporation including issues on economy and efficiency that could impact the Province of Nova Scotia.”

Subsequent to accepting this assignment, the Auditor General of Nova Scotia invited the Auditors General from the other three Atlantic Provinces to participate in this audit.

There were no restrictions or limits placed on the scope of the assignment which was planned and conducted as a legislative audit. The audit was performed jointly by audit staff from Nova Scotia and New Brunswick, with audit plans and results being reviewed with the Auditors General of Newfoundland and Prince Edward Island.

Since being established in 1976, ALC has reported sales in excess of $4.7 billion up to and including the fiscal year ended 31 March 1996. After prizes, commissions and other costs of approximately $3.1 billion, ALC has distributed profits of $1.56 billion to its shareholders of which $383 million has been distributed to Newfoundland. On behalf of its four shareholders, ALC is now directly involved in the annual management and control of more than $1 billion of public funds through its various gaming products and related activities.

The objective of the audit was to review the systems and practices for the management and control of selected areas or aspects of ALC’s operations. The audit indicated the following.

The audit did not identify any significant control weakness that would impact upon the overall integrity of financial records of ALC. In addition, nothing was observed that would indicate that the integrity of ALC’s lottery and other gaming products has been adversely affected.
Changes necessary to improve the overall governance and accountability arrangements need to be considered. For example, during the audit, a number of issues were identified which indicate the inter- provincial agreements and corporate bylaws should be revisited to determine if they provide the appropriate level of guidance to ALC and its shareholders.
ALC approved its Information Technology Strategy in 1992. The most significant initiative of the 1992 strategy, the New Retail Terminal Project, was actively underway when the audit was conducted in 1996. This project is intended to replace all existing on-line terminals at an estimated total cost of $31.2 million over the next three years.

Two major issues related to this project were identified during the audit.

- The 1992 Information Technology Strategy and related business plan indicated that the impact of the New Retail Terminal Project on profit would accumulate to $50 million by the end of 1997-98. However, these benefits should have been updated in 1996 when they commenced the project to determine if they were still valid.
- ALC should have estimated the net benefits in terms of future profit distributions to the shareholders, and formally presented this information to the Board. Also, the method of how depreciation on the terminals would be allocated amongst the shareholder provinces was raised as an issue, since the method selected will impact profit distribution amongst the provinces.
In general, the review of procurement activities indicated ALC’s procurement policies were being complied with.

However, ALC’s inter-provincial agreements, corporate bylaws and Board resolutions do not provide any specific parameters with respect to achieving fair and equitable distribution of the economic impact or benefits provided by ALC expenditures to each of the four shareholder provinces.

Despite the absence of direction on the delivery of economic benefits, Board members have maintained a steady interest in the distribution of ALC’s procurement activity. Since 1990, ALC has prepared at least four reports titled the Economic Benefits Analysis. A summary of one of these reports is included in Part 3.9 of the Report of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Year Ended 31 March 1997.

ALC’s profit allocation methodology was established in 1991 when the Video Lottery Program (VLP) was just being implemented. This program, which now represents 58% of ALC’s net sales, is not charged with any of ALC’s general overheads. Further, certain costs related to the VLP are being allocated instead to ALC’s other games. This inconsistency has highlighted the need to re-examine the whole profit allocation methodology.

The manner in which costs and profit are currently being allocated results in certain shareholder provinces, in essence, subsidizing the results in other jurisdictions by having more than their share of direct costs charged against their net sales. This latter point is especially relevant to retail commissions and depreciation, which more reasonably should be charged directly to each province as opposed to being allocated based on net sales.

ALC’s head office staff and related activities have been located in a combination of owned and rented office space for a number of years. In 1997, ALC’s head office will be consolidated in premises in a newly renovated building in downtown Moncton under the terms of a 10-year lease.

The audit raised concerns about the adequacy of the audit/management trail supporting the Board’s deliberations and decisions relating to the acquisition of ALC’s new head office facilities, which will consolidate head office staff and related activities in one location. Although the issue of ALC’s head office space was dealt with at numerous Board meetings, the net benefits to accrue to shareholders as a result of the additional costs to be incurred were not formally quantified and provided to the Board as part of its decision making process. Further, it is unclear as to the extent of review, challenge or approval provided with respect to key assumptions made and analysis provided by management (i.e., average space standard per position and projections for staff growth).

Further, the Board’s decision by majority vote, was made at a time when one of the shareholders (Nova Scotia) was in the process of reviewing the structure and arrangements for the Corporation. The formal review regarding decentralization of ALC’s activities had been commissioned but had not been finalized at the time the Board approved the new 10 year lease. The audit concluded that the decision should have been deferred until the review was completed.

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3.10 Review of Government’s Pension Plans

Prior to 1967, public service pensions in the Province were paid under the authority of the Civil Service Act. These pensions were non-contributory and as such employees and Government were not required to make contributions to a pension plan. The Province was paying 100% of the annual pension benefits out of the Consolidated Revenue Fund. In 1967, legislation was enacted which required that employees contribute to a pension plan along with the Province. These employee contributions were paid into the Consolidated Revenue Fund and pension benefits continued to be paid out of it.

In 1981 the Pensions Funding Act was enacted to create a separate fund for the funding of public service pensions. This legislation required that employee and employer pension premium contributions be paid into a separate fund, the Province of Newfoundland Pooled Pension Fund. The affairs of the Fund are managed by the Minister of Finance, as Trustee of the Fund. The Fund is comprised of four pension plans: the Public Service Pension Plan, the Teachers’ Pension Plan, the Uniformed Services Pension Plan and the Members of the House of Assembly Pension Plan. The Teachers’ Pension Plan includes the Teachers’ Ancillary Pension Plan.

The large increase in pensions and pensioners has contributed to the financial uncertainty of each of the pension plans. At 31 March 1997 the plans had an estimated unfunded liability of $3.1 billion.

Commencing during the fiscal year 1997-98, Government is proposing to make special payments to the Public Service Pension Plan. Government has announced that it will contribute $30 million in each of 1997-98 and 1998-99. Every year after that it will continue with payments of at least $40 million per year until the pre-1980 debt is repaid. In addition, Government is proposing to increase the contributions for employees and employers over the next four years. This will extend the life of the plan beyond the year 2030.

We reviewed pensions paid by the Province of Newfoundland Pooled Pension Fund from 1 January 1987 to 31 December 1996. Our review indicated the following:

Since 1994, eligibility for disability benefits under a pension plan is based on the recommendations of the Division’s medical consultant that the disability is permanent. Prior to this time pension eligibility was based on the assessment of the examining physician and in some instances a specialists.

Our review disclosed a number of cases where the doctor’s assessment indicated that the disability may not be permanent. However, there was no follow-up to determine if the employee could return to work.

Government policy applicable to government departments, Crown agencies and Crown corporations requires that preference be given in hiring to persons other than those in receipt of a pension under one of the four public sector pension plans, unless there are no other persons qualified to fill the position. All exceptions to this policy require Cabinet approval. As a control, the Pensions Division regularly performs a comparison of the pension payroll to the annual listing of contributors sent in from the various agencies and anybody who is contributing to a pension plan while drawing a pension is investigated. However, this process does not detect re-employed pensioners not contributing to a plan.

Our review of the general service and teachers’ payrolls identified 149 employees who received both a salary and a pension in 1996. Salaries ranged from $25 to $43,234 while pensions ranged from $2,108 to $60,926. Of the 149 employees only 2 had received Cabinet approval as required by government policy.

While many of the amounts paid are small, Government’s policy does not provide any exemption based on the dollar value of the pension or salary being paid.

The unfunded liability of public sector pension plans is estimated to be $3.1 billion as at 31 March 1997. The unfunded pension liability is the amount by which the present value of estimated future pension benefits exceeds the assets in the pension plan.
- Three of the five pension plans are depleted of assets. The Uniformed Services Pension Plan and the Members of the House of Assembly Pension Plan required payments from the Province of $6.3 million and $1.4 million respectively in 1996 in order to pay pension benefits to pensioners. The Teachers’ Ancillary Pension Plan was depleted of assets in 1996 and borrowed $1.9 million from the regular Teachers’ Pension Plan during that year to pay pension benefits.
- Borrowing by the Teachers’ Ancillary Pension Plan from the regular Teachers’ Pension Plan, as negotiated in the teachers’ collective agreement, contravenes the Teachers’ Pension Act which states that benefits payable under the Ancillary Plan shall only be paid to the extent funds are available in the Ancillary Plan to pay the benefits.
- The Teachers’ Pension Plan is projected to be depleted of assets by 2004 or by 2003 should it be used to cover the deficiencies of the Teachers’ Ancillary Pension Plan. The Public Service Pension Plan was expected to be depleted of assets by 2019. However, with Government’s special payments and the additional contributions, it is estimated that the Public Service Pension Plan’s assets will not be depleted before 2030.
- Deficiency payments of $7.7 million were paid by the Province in 1996 for the two pension plans already depleted of assets (the Uniformed Services Pension Plan and the Members of the House of Assembly Pension Plan). Deficiency payments by the Province are expected to increase to $120 million in 2004 when the Teachers’ Pension Plan is expected to be depleted of assets and to $460 million in 2019 if the extra payments are not made to the Public Service Pension Plan.

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3.11 Newfoundland Liquor Corporation

The Newfoundland Liquor Corporation is an agent of the Crown incorporated under the Liquor Corporation Act of 1973. It is charged with overseeing the import, manufacture, possession, and sale of all alcoholic beverages within the Province. It is governed by a board of directors appointed by the Lieutenant-Governor in Council.

Each year the Corporation remits contributions from its net income to the Province. Over the past six years these have ranged from $73.3 million to $81.5 million with $81.2 million budgeted for the fiscal year ended 31 March 1998.

In 1992 the Newfoundland Liquor Licensing Board, charged with the issuing and enforcing of liquor licences, was merged with the Liquor Corporation. With this merger, however, each entity’s board of directors was retained to manage the two different aspects of the Corporation’s operations. Effective 1 January 1997 the boards were merged into one new board. Effective 1 April 1995 the licensing branch was made part of the new Government Service Centre, leaving only the enforcement division of the old Liquor Licensing Board as part of the Liquor Corporation.

We completed our review of the Corporation in November 1997. Our review indicated the following:

Since March 1992 the Corporation has privatized 13 retail stores, converting them into agency stores. They have also approved four agency stores in communities where there were no retail stores. The Corporation has predefined criteria to be used in selecting which retail stores should be converted to agency stores.

The Corporation also has predefined criteria to be used in selecting the successful applicant for an agency store. However, our review identified areas where the selection process could be improved. For example, the assessment of the criteria by the Corporation is subjective in that the evaluations of the proposals received are not quantified. A point system would enable the Corporation to better demonstrate how the successful applicant was selected.

In addition, the process to select the successful applicant for an agency store could be improved if the Corporation developed written procedures to outline the documentation required in the applicants’ evaluation files.

The Corporation did not always comply with the Public Tender Act. The Corporation’s policy for purchases less than $1,500 is in contravention of the Act since the policy does not require that quotes from three suppliers be obtained for these purchases. We also identified instances where the lease of store space was not in accordance with the provisions of the Act.
Deficiencies were noted in certain areas of expenditure. Policies and procedures do not exist for the hiring of external consultants, resulting in some consultants being used for many years without evaluation and requests for proposals.

The Corporation does not have documented travel guidelines to ensure consistency in the preparation and approval of travel claims. Also, vehicle use and expenses are not being properly monitored.

The roles and responsibilities of the Board and its various committees are not defined and member profiles are not developed outlining the criteria to ensure the appointment of members with the required expertise. In addition, vacant Board positions have not been filled on a timely basis.
The Corporation’s management practices are lacking in some areas. In particular, strategic and operational plans have not been developed and no marketing plan exists for the promotion of its products. The Corporation’s budgeting process does not reflect the potential savings from the privatization of retail stores. In addition, human resource policies and managerial position descriptions have not been updated to reflect changes in the Corporation, and performance evaluations are not being performed on all employees.

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3.12 Vehicle Fleet Management

Minute of Council 1272-79 assigned the Department of Works, Services and Transportation with the responsibility for the efficient and effective management of Government’s fleet of light vehicles including cars, station wagons, 4-wheel drives, vans and small trucks.

Government had 869 light vehicles in operation at 20 February 1997. These vehicles had a total acquisition cost of approximately $15 million. In addition to these 869 vehicles, the fleet inventory, at the end of February 1997, also included 94 vehicles which were being held for disposition.

For this same period, Government also rented 117 vehicles for the equivalent of 307 months at approximate rental, maintenance and operating costs of $601,000. These costs were obtained from the various departments and from the Equipment Management System. However, it was not possible to identify all costs relating to rental vehicles. For example, operating costs are not available for the vehicles rented by the Departments of Fisheries, Food and Aquaculture, Justice, and Executive Council, nor are operating costs available which were reimbursed on travel claims or acquired through direct purchase order. Without this information, it is not possible to determine whether it is more cost effective for Government to rent or purchase vehicles.

For the year ended 31 March 1997, total costs associated with managing Government’s light vehicles, excluding the operation of repair facilities, insurance, and other transportation costs was approximately $7.7 million. For the same period, approximately $15 million was incurred for the operation of repair facilities (excluding capital) and $667,000 was incurred for insurance. These amounts, however, are for maintaining both heavy and light vehicles and equipment and information on the cost allocation between heavy and light vehicles and equipment could not be provided. In addition, $12.1 million was spent on other transportation methods. This includes, not only taxis, personal mileage and short-term rentals, but also airfares, hotels and meals. There is no information available on costs specific to taxis, personal mileage and short-term rentals.

We completed our review of fleet management for light vehicles in May 1997. Our review focused on the Fleet Management Branch and the Departments of Works, Services and Transportation, Forest Resources and Agrifoods, Justice, Government Services and Lands, and Tourism, Culture and Recreation. These five departments operate approximately 90% of Government’s light vehicles. Our review of Government’s light vehicles indicated the following.

In 1991, Government directed a reduction in the number of its light vehicles from 1,077 to 908 by 29 March 1991, with an objective of further reductions to a fleet in the vicinity of 600 vehicles. In February 1997, there were 869 Government-owned light vehicles. While the size of the fleet has been decreasing, Government could not justify its present complement of light vehicles.
Government purchased 116 light vehicles in 1996-97. Departments do not provide adequate documentation to justify the need for the new vehicle acquired. In addition, there was no evidence that these vehicles were the most economical vehicles available to meet the transportation needs of Government.

Cost information needed to assess alternatives to purchasing vehicles is not available. Such alternatives include leasing, use of car allowances, use of taxis, and reimbursement for personal vehicle usage.

A computerized information system is used to facilitate the management of Government’s light vehicles. A review of this system indicated that the information produced is not timely, complete, accurate or understandable.
Most users of the reports produced by the computerized information system indicate they did not review or analyse the information provided. As a result, the cost of maintaining Government’s light vehicles and the extent of their usage is not being adequately monitored.
At the end of February 1997 there were 869 passenger vehicles with an original acquisition cost of $15 million. For the eleven months ended February 1997, information recorded in the computer system indicated that these vehicles travelled in excess of 24 million kilometres at approximate operating and maintenance costs of $4 million; however, our review indicated that not all costs are included in this system.
In addition, the Department operates 50 repair facilities to service Government’s heavy and light vehicles and equipment. For the year ended 31 March 1997, the cost of operating these repair facilities (excluding capital costs and insurance) was $15.0 million. However, the portion of these costs relating to the light vehicles is not known. Without complete information, Government does not know the total cost of operating its light vehicles.
Fleet Management policy requires that vehicles driven less than 10,000 kilometres per year must be reviewed to ensure that continued use of the vehicle is justified; however, there are no reports produced for this purpose. We identified 244 vehicles in February 1997 which were driven less than 10,000 kilometres in the preceding year and for which continued operation had not been justified.
Fuel pumps at the Department’s largest refuelling site in St. John’s are computerized and are accessed with individual keys encoded with the vehicle and department number. At the time of our review, there were 869 light vehicles and 1,448 keys had been issued. The Department could not provide us with a listing indicating which department or which vehicle were assigned each of these keys.
Credit cards are also available to purchase fuel for Government’s light vehicles. As of February 1997, there were 819 active credit cards. However, our review of a sample of 12 vehicles which had been disposed of in 1996-97, identified 4 credit cards which were still active even though the vehicles had been sold for several months. As a result of the inadequacies of the Department’s Computer System to capture information by transactions date, we could not determine whether charges were made to the inactive cards.
There are often considerable delays in carrying out recommended preventative maintenance work which may result in increased repair and maintenance costs in the future.
Of the 869 vehicles in operation as of February 1997, 412 were older than six years. There is no formal vehicle replacement policy and information on the deferred costs associated with maintaining vehicles beyond their economic lives is not known.
There is no system to ensure vehicles are promptly disposed of. In addition, the information system used to manage Government’s vehicle fleet is not always promptly updated for dispositions, which reduces the usefulness of the various information reports prepared from the system.

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3.13 Government Purchasing Agency – Public Tender Act Exception Reporting

The Public Tender Act provides legislative direction for the calling of tenders for the acquisition of goods and services by all government funded bodies. Government funded bodies include all departments, the Government Purchasing Agency, Crown corporations and agencies of the Crown, municipalities, school boards, hospitals and Memorial University of Newfoundland. In general, the Public Tender Act requires that, with few specific exceptions, tenders be invited for the purchase of goods or services or the execution of a public work.

Where a tender is required and one has not been called, the head of the government funded body must inform the Minister of Works, Services and Transportation within five days of the awarding of the contract. The Minister must table this information in the House of Assembly within thirty days indicating the reasons why a tender was not called for each of the items not tendered.

We carried out a review at the Government Purchasing Agency to determine whether all public tender exceptions were tabled in the House of Assembly as required by the Public Tender Act. We also reviewed the system in place at the Government Purchasing Agency to determine whether it was recording all public tender exceptions.

Our review disclosed that although all exceptions that are reported to the Government Purchasing Agency are forwarded to the Minister of Works, Services and Transportation for tabling in the House of Assembly, the Government Purchasing Agency is not notified by government funded bodies of all exceptions. Therefore, the exception reports which are tabled in the House of Assembly are incomplete.

Although the Act and Regulations require government funded bodies to report their public tender exceptions to the Minister of Works, Services and Transportation within five days of the awarding of the contract, our review indicated that some exceptions were not reported by the government funded body until more than two years after the awarding of the contract.

In addition, some of the reports which are tabled in the House of Assembly are not being tabled within the time frame specified in the Act.

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3.14 School Board Expense Review

The Department of Education spent in excess of $734 million on developing and maintaining a provincial education system in 1996-97. Seventy-five percent of this amount was spent in providing financial assistance to school districts to administer a primary, elementary and secondary school system.

On 1 August 1996, in accordance with subsection 4(1) of the amended Schools Act, the Lieutenant-Governor in Council established 10 school districts under the Boundaries of School Districts Order. The existing 27 school boards continued to exist and administer the schools within their jurisdiction until their dissolution on 31 December 1996.

We completed a review of the restructuring of the 27 school boards into 10 district school boards. The objective of this review was to assess whether financial controls and practices during the windup were adequate and whether transactions were made in accordance with Government and board policies and procedures. This review included an examination of staff remuneration, operating expenses and capital asset controls of three former school boards, and a review of staff remuneration for seven other former boards during the 18-month period prior to the dissolution of these school boards.

As a result of findings during our review of the old boards, we expanded our examination to review compensation practices at three of the new district school boards. Our review indicated the following.

Financial controls and practices during the windup of the Province’s 27 school boards and the start-up of the 10 new district school boards were not adequate. In addition, in areas where it was apparent that boards were not complying with Department of Education policy, the Department did not initiate any action to ensure boards adhered to its policies. Specifically:

The executive staff, consisting of director and assistant director positions for the 10 new district school boards, are required to be paid using salary scales approved by the Lieutenant-Governor in Council. When approving these salary scales, the Lieutenant-Governor in Council directed the Department of Education to ensure that boards place employees on the approved scale at the step next highest to their current salary, but in no case above step 33.

The Minister of Education communicated the approved salary scales to the district school boards on 25 October 1996 and at that time indicated that the boards did not have the authority to top up the approved salaries. However, in a letter dated 15 November 1996 to the executive director of the Newfoundland and Labrador School Boards’ Association, the Minister provided flexibility to the boards in placing executive staff at a step on the approved scale not in excess of step 25 as long as the boards had other funds to pay these salaries.

A review of all 10 new district school boards’ salary classifications identified seven boards which had informed the Department of Education to pay some of their directors and assistant directors at higher levels than that approved by the Lieutenant-Governor in Council. Contrary to the direction of the Lieutenant-Governor in Council, the Department of Education paid the higher salaries as requested by the school boards. The amount in excess of the approved levels totalled approximately $160,000. Although the Department is not funding this additional salary through its salary grants to school boards, it is being funded through other grant sources.

The salary scales for the director and assistant director positions for the 10 new school boards were established using Treasury Board’s Hay system for executive staff. This resulted in salary scales for employees based upon their level of responsibility. However, boards were directed to place employees on the step of the scale next highest to their current salary and as a result inconsistencies in salary levels within the previous system have been incorporated into the current system.
There are 10 directors and 30 assistant directors in the 10 new school boards. In establishing the minimum salary a director or assistant director could be paid the Department requested employees to complete a form indicating their current annual salary levels. We assessed the accuracy of 12 of the 40 salary submissions. Our review indicated that 5 of the 12 salary submissions included one- time bonuses, bonuses not actually paid, inflated bonuses and one-time vacation payments as part of their annual salary. The Department’s annual funding for administrative salaries for 5 of the 12 school board executive positions is therefore overstated by approximately $26,000.
The Department of Education informed the school boards that employees who accept lower paying positions as a result of their positions being made redundant be treated in accordance with Government’s voluntary demotion policy. This policy states that the rate of pay for the employee shall be established on the pay range of the new position at a rate that does not exceed the employee’s present rate. Our review disclosed two instances where employees’ salaries were maintained at their old rates when their previous positions were declared redundant and they were transferred to lower paying positions with the new boards. This results in approximately $25,000 being paid annually in excess of what they should have received.

Our review of 10 former school boards during the period of dissolution indicated numerous instances where the boards did not comply with the direction of the Minister of Education and the Schools Act. Specifically:

In July 1996, the Minister of Education informed school boards that, upon retirement or resignation, superintendents and assistant superintendents are entitled to payment for up to 50 days annual leave which was in accordance with Departmental policy. Our review disclosed five instances where former superintendents and assistant superintendents received a total of $65,917 in board payments in addition to the 50 days paid or brought forward by the Department.
Superintendents’ and assistant superintendents’ annual salaries, representing 365 days, were paid out over 26 pay periods or 364 days. Over a five to six year period this results in one week’s pay. The Department of Education, in accordance with the Newfoundland and Labrador Teachers’ Association Collective Agreement, did not pay the superintendents’ and assistant superintendents’ salaries for one week in August 1995. However, 9 of the 10 former boards examined paid this week’s salary from other funding.
All three of the former boards that we examined in detail held annual and retirement dinners and gave appreciation gifts to board members and staff. Total costs of these dinners and gifts were approximately $19,000. Also, one of these boards gifted two computers to two retiring employees, one of which had an original cost of approximately $5,000. We note that neither the Schools Act nor the July 1996 amendment to the Act provided for such transactions.
In three of the former school boards we examined controls over assets at the time of dissolution. We found that these school boards did not maintain an adequate record of assets. Listings were prepared as a result of the dissolution of the school boards. However, these could not be supported by an ongoing record of capital assets. We also note that these listings did not always provide brand names or serial numbers for easy examination.

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3.15 Newfoundland Farm Products Corporation

Newfoundland Farm Products Corporation was established in 1963 under the Farm Products Corporation Act. On 6 October 1997, Government announced the sale of the Corporation to a consortium of local chicken producers. As a Provincial Crown corporation, Newfoundland Farm Products Corporation produced a full range of chicken products which were marketed throughout the Province, the Maritimes and central Canada. The Corporation operated two federally inspected abattoir complexes in the Province, one in St. John’s and one in Corner Brook. The Corporation processed 8.0 million chickens per year, 5.1 million in St. John’s and 2.9 million in Corner Brook, resulting in 11.8 million kilograms of saleable product in 1996-97. The Corporation employed approximately 275 people and had an annual payroll of $10.2 million.

Sales for the past 10 years averaged $25.3 million per year, ranging from $21.4 million in 1987-88 to $35.9 million in 1996-97. The net operating loss for the past 10 years averaged $4.3 million per year, ranging from $2.1 million in 1987-88 to $7.9 million in 1996-97. Operating grants from the Province for the past 10 years totalled $35.7 million.

We commenced a review of Newfoundland Farm Products Corporation in January 1997, prior to the privatization of the Corporation.

Our review indicated that certain compensation practices at the Corporation were not appropriate. We identified payments totalling $76,106 to three senior officials which did not comply with Government’s compensation policies. In accordance with Section 15(1)of the Auditor General Act, these matters were reported to the Lieutenant-Governor in Council in April 1997. I have been informed by Government that it directed the Corporation to recover amounts totalling $55,406, comprised of $5,801, $28,336 and $20,909 from the respective officials.

In accordance with Section 15(1) of the Auditor General Act, certain other transactions of the Corporation were reported to the Lieutenant-Governor in Council in November 1997.

Government is presently reviewing that report. As a result, the audit report on Newfoundland Farm Products Corporation has not been included in this Annual Report.

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3.16 The Privatization of Newfoundland Hardwoods Limited

As at 31 March 1995, Newfoundland Hardwoods Limited had total assets of $14.8 million, liabilities of $1.0 million and shareholders’ equity of $13.8 million. From 1991 to 1995, Hardwoods had annual average sales of $12.9 million and during that period remitted dividends to the Province totalling $4.7 million.

When Government decided to privatize the Corporation, a business valuation performed by the divestiture consultant indicated the fair market value of the Corporation ranged from $8.6 million to $9.6 million. The 1995-96 provincial budget indicated that proceeds from this privatization were estimated at $8.5 million. Government sold the capital assets and inventory of the company in August and September 1995 for $6.7 million and estimated the immediate cash flow from this privatization to be $7.0 million. The Province will also receive 10% of Wood Preservation Industries Limited’s net income to 31 October 2000. Wood Preservation Industries Limited purchased the poles and timber treatment operations of Hardwoods.

In our 1996 Annual Report to the House of Assembly, we reported on the results of our review of the privatization of Newfoundland Hardwoods Limited. This review disclosed that although the assets of Newfoundland Hardwoods were sold in August and September 1995, as of October 1996, the transaction had yet to be finalized, audited financial statements for the year ended 31 March 1996 had not been released, and the Province had only received $5.6 million of the anticipated $7.0 million in proceeds.

We now report that, as of November 1997, the transactions relating to the sale of the Corporation have still not been finalized, the audited financial statements for the years 31 March 1996 and 1997 are still not available, and the Province has still not received $1.4 million of the $7.0 million that was initially estimated. In addition, the consultant who had originally been engaged based on a proposal of $39,000 plus disbursements for phase 1 of the divesture is still engaged to wind up the Corporation. Total fees paid to this consultant to date have been approximately $500,000 while other consultants have been paid $400,000.

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3.17 Residential Services Program

In an effort to provide individuals with developmental disabilities with access to the community and to reduce overall Government expenditures, the Department of Social Services set up the Residential Services Program and closed institutions such as Exon House and Children’s Home. This new Program included the use of special foster care in private homes, a developmental group home, 2 developmental maximization units and 24 group homes.

As a result of a departmental review in 1989, it was recognized that group homes were not fulfilling their original mandate of placing individuals in a home-like environment and there was an increased availability of other community living arrangements, such as co-operative apartments, alternate family care and individual living arrangements.

Expenditures for group homes and co-operative apartments under the Residential Services Program for individuals with developmental disabilities has decreased from $13.1 million in 1990-91 to $7.1 million in 1996-97. There are approximately 71 individuals served at an average monthly cost of $10,392, for an annualized expenditure of $124,704 per individual. By way of comparison, the average cost per individual per month under the Home Support Services Program is $1,212, for an annualized expenditure of $14,544 per individual.

Our review of the Residential Services Program indicated that there are a number of weaknesses in the management of the Program and as a result there are opportunities to strengthen controls.

The following issues were identified during our review:

The Department does not have a standardized assessment tool to be used in determining the appropriate level of care to be provided to each individual with developmental disabilities. As a result, the reasons for differences in annual expenditures for each individual group home and co-operative apartment are not readily available.
With the exception of 6 homes which are mortgaged and 1 home that is provided by a client’s family, the Department funds rent on the remaining 25 homes. However, the Department has no policy on how the rental accommodations are selected and the maximum amount to be funded by the Department. Annual rents vary from $4,800 to $23,768 and at least four of the homes rented are owned by the same individual. As a result, there are inconsistencies in the housing arrangements for individuals in group homes and co-operative apartments.
Group homes and co-operative apartments are not operating, in all cases, at full occupancy. As a result, the Department is incurring expenditures in excess of the amount that it needs to operate the Program.
There are no signed service agreements between the Department and the independently operated community boards that manage group homes and co-operative apartments. As a result, the Department does not have an accountability structure in place to clearly define the roles and responsibilities of these boards.
The Department, as part of its total funding to the group homes and co-operative apartments, funds various assets including office equipment, home appliances and furniture, automobiles and the mortgage payments on houses owned by the boards. For example, one board has a house for which the mortgage is being funded by the Department and there is no agreement in place to address the disposition of the property in the event of a wind-up of the board. The Department intends to include the disposition of assets in its service agreements.
Some boards have relatives of the individual(s) serving on the board. While this is a positive approach to meeting the needs of the individuals receiving services, there is a potential for conflict of interest issues.
For the past several years, the Department, rather than the boards, has been preparing the budgets for the group homes and the co-operative apartments. This does not comply with the Department’s policy. As a result of this budget process, there is no meaningful challenge of the boards’ budgets and boards cannot be held fully accountable for the results of operations. In 1995-96, 8 of the 14 non-profit entity boards had expenditures in excess of the amounts budgeted by the Department.
In the 1995-96 budget for the Residential Services Program, the Department requested, and the Government approved, approximately $1.1 million in funding for one group home and five co-operative apartments that were closed or scheduled to close when the Department prepared its budget. As a result, the Department’s budget was overstated by $1.1 million. The Department used the $1.1 million for additional funding requests.
The individuals displaced by the closure of the group homes and co-operative apartments identified above were transferred to the Home Support Services Program. Our review indicated that it generally costs less to provide services to these individuals under the Home Support Services Program.
The Department is not adequately monitoring the activities of these boards. For example, quarterly financial information is not received on a timely basis. As a result, the Department is unable to react to changes in the boards’ financial positions throughout the year.

Although the Department has a zero tolerance policy with respect to deficits, it is not enforcing the policy. Of the 14 boards operating as at 31 March 1996, 8 reported deficits that totalled $262,645. The Department provided funding of $154,930 towards the accumulated deficit of one board.

Even though the Department prepares the budgets and makes quarterly payments to boards, it has not reduced the funding by the boards’ surplus amount in all instances as required by departmental policy. The Department’s policy requires that all surpluses greater than $3,000 are to be returned to the Province or deducted from the quarterly instalments paid to the boards. Of the 14 non-profit entity boards, 6 have a combined surplus of $94,174 as at 31 March 1996.
The Department does not adequately review the financial statements of the non-profit entity boards to ensure that expenditures relate to the approved budgets.

Several group homes and co-operative apartments have exceeded rates established for certain categories of expenditures. The Department has not determined the reasons for these variances and has not carried out any on-site reviews of these expenditures.

Not all expenditure categories have limits. As a result, certain types of expenditures vary significantly between group homes and co-operative apartments.

The Department provides approximately $877,000 per year to hire staff for individuals who do not attend day programs. However, the Department is not obtaining sufficient information to determine what services are being obtained with this funding and the progress of individuals obtaining services.

These costs are budgeted and recorded elsewhere in the Department and, as a result, the total cost of the Residential Services Program is not considered when monitoring expenditures.

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3.18 Central Regional Community Health Board

The Central Regional Community Health Board was established in February 1994 and operates under the authority of the Public Health Act and the Central Regional Community Health Board Order. Its operations are governed by a Board of Directors, comprised of 14 members appointed by the Minister of Health. The Board is responsible for providing community health services to approximately 120,000 people in 210 communities.

By the start of the 1995-96 fiscal year, the Board had integrated the services, programs and staff members from the Gander and District Continuing Care Program, the Central Newfoundland Health Unit, and the Drug Dependency Services Division of the Department of Health. Since then, the Board has assumed additional programs, and now employs approximately 125 staff.

Operating expenditures for 1995-96 were approximately $10.1 million and $12.7 million for 1996-97.

We completed our review of the Central Regional Community Health Board in February 1997. Our review indicated the following.

Since its establishment in 1994, the Board has seen a significant increase in its programs and budget. Although a strategic planning process was started in May 1995, it was put on hold because of the changes caused by the transfer of these new programs from government departments. As a result, the Board has not completed a strategic plan.

Operational planning needs improvement in that it does not include the establishment of annual performance objectives with measurement criteria, time frames and assignment of tasks to specific individuals. Furthermore, operational planning is hampered in that the Board’s annual budget is not always approved by the Department of Health prior to the commencement of the fiscal year and the Board is not always provided with timely notification about programs and related budgets transferred to them.

The Board monitors the utilization of its program resources through the use of statistics on caseloads, workloads, waiting lists and monthly financial reports. Although the Board maintains separate databases for each of its major programs, the systems for monitoring this information are not adequate. In particular:
- The monitoring of program performance data is a manual process and thus time consuming and inefficient. Performance information such as workload and caseload statistics is not integrated with the financial data to provide costs for individual activities. The Board has not developed performance standards which can be used to compare actual results. Actual performance results are not reported to the Board for review and analysis.
- There is no formal follow-up with clients within the Home Support Program for Seniors to ensure they had received the care paid for by the Board. Time sheets to support such payments did not always have the proper signatures. In addition, client files did not always contain adequate support for incomes and debts, and drug cards were issued for inconsistent periods of time, depending on the financial assessment officer.
- The Board has 14 personal care homes in its region with 175 subsidized beds and 191 unsubsidized beds. There is no periodic review of individual files to ensure adequate documentation exists to support the subsidies. Documentation to support client income and prorated subsidy calculations is not always on file.
Our review did not indicate any instances of non-compliance with the Public Tender Act. However, the Board has not documented its policies and procedures for the acquisition and control of goods and services.

The Board is not adequately safeguarding its capital assets since there is no listing of capital assets and assets are not tagged, counted annually, or agreed to the financial records.

A review of the recruitment, hiring, and evaluation of staff and the monitoring of leave and overtime disclosed that these areas were adequately monitored; however, except for public health nurses, performance evaluations are not performed. In addition, leave is monitored manually and, as such, is time consuming and does not provide for periodic reporting.

In November 1995, the Board requested Treasury Board to approve its reclassification of 12 management positions. The Minister of Health advised the Board not to proceed with this reclassification. The Board, however, proceeded with the reclassification and paid $69,302 in retroactive salary to these 12 staff.

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3.19 Faculty of Medicine of Memorial University of Newfoundland

The Faculty of Medicine of Memorial University of Newfoundland was established in 1967. Its purpose is to enhance the health of the people of Newfoundland and Labrador by educating physicians and health scientists, by conducting research in clinical and basic medical sciences and applied health sciences and by promoting the skills and attitudes of lifelong learning.

Each year approximately 60 students are accepted into the Faculty’s four year undergraduate program, with the majority of places reserved for residents of Newfoundland. Tuition fees for an undergraduate degree are $6,250 per year for Canadian students and $30,000 per year for non-Canadian students.

The Faculty also offers programs in postgraduate training (residency), continuing medical education and graduate studies leading to the degrees of Medical Science and Doctorate.

The Department of Health provides annual operating grants of approximately $17.0 million to the Faculty of Medicine of Memorial University of Newfoundland. For the year ended 31 March 1997, this operating grant of $17.0 million represented 68% of the Faculty’s total revenue and 84% of its operating revenues. In addition to the $17.0 million operating grant, the Department also provides annual funding of approximately $8.9 million for the training of post-graduate students. Although this funding is submitted in a separate budget by the Faculty, the funds are actually paid to the Health Care Corporation of St. John’s with whom the students are training.

Our review indicated that the Department of Health does not have an adequate system of accountability over the grants provided to the Faculty of Medicine. For example:

The Department is not requesting sufficient information to determine whether the Faculty is effectively spending operating grants for the intended purposes. Such information would include interim and annual audited financial information, and information on program objectives and accomplishments.
The Department has not performed any audits of the Faculty’s operations to assess the adequacy of management systems and controls and compliance with authorities.

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3.20 Western Memorial Hospital Corporation

In our 1996 Annual Report to the House of Assembly, we reported on the results of our review of the Western Memorial Hospital Corporation. The audit identified significant problems at the Corporation, details of which were included in our 1996 Annual Report.

Our review in 1996 focused on the Corporation’s financial statements for the year ended 31 March 1995, as audited by a public accounting firm, and subsequent transactions to 31 December 1995. At this time the Corporation was amalgamated with the new Western Health Care Corporation. Subsequent to this review, we requested a copy of the Western Memorial Hospital Corporation’s audited financial statements for the period ended 31 December 1995 and copies of the Western Health Care Corporation’s audited financial statements for the period ended 31 March 1996 and the fiscal year ended 31 March 1997. These financial statements would indicate the Corporation’s surplus or deficit for each period, as well as the financial position at the end of each period.

Of particular interest is the extent to which the Corporation’s debt has increased or decreased from the $4.5 million as at 31 March 1995, the amount of the Corporation’s accumulated deficit, and the amounts owing from third parties and associated funds. During a Public Accounts Committee meeting on 9 September 1997, officials of the Corporation indicated that their line of credit was at $13.0 million.

We have been informed by officials of the Corporation and the Department of Health that audited financial statements for the period ended 31 March 1996 and the fiscal year ended 31 March 1997 are not available. It concerns us that given the significance of issues raised during our 1996 review, the audited financial statements of the Western Health Care Corporation for the period ended 31 March 1996 and the fiscal year ended 31 March 1997 are still not available as at 31 October 1997. In our opinion, without timely audited financial statements, the Corporation is not being accountable for the expenditure of large amounts of public funds and as a result is not fulfilling its responsibility.

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3.21 Health Care Corporation of St. John’s

On 2 December 1996, the Public Accounts Committee by resolution requested the Auditor General to conduct an inquiry into and report on the financial affairs of the Health Care Corporation of St. John’s.

We commenced our review in January 1997 and forwarded our report to the Public Accounts Committee on 29 August 1997. On 4 September 1997, the Chairman of the Public Accounts Committee tabled the Report in the House of Assembly. Our review disclosed the following.

There are significant financial implications associated with the restructuring of health care services in the St. John’s region which is estimated to cost $130 million. The Health Care Corporation of St. John’s anticipates operational savings of $20.52 million annually from the restructuring of health care services, of which $13.2 million will be used to finance the $130 million in capital costs, while the remaining $7.32 million will be redirected back into health care programs.

We have three major concerns regarding the completeness and accuracy of information relating to the planned restructuring of health care services. These can be summarized as follows:

- The $130 million does not include all costs relating to the restructuring. For example, it does not include the costs of acquiring the St. Clare’s Mercy and Salvation Army Grace General Hospitals which were purchased in 1994 and 1996 respectively.

There are also other significant costs not included in the $130 million such as the costs of closing the Salvation Army Grace General Hospital and the Dr. Charles A. Janeway Child Health Centre, the moving expenses to the new and renovated buildings, and the cost of capital equipment for the newly constructed and renovated facilities.

- The Corporation has estimated that the restructuring of health care services will realize operational savings of $20.52 million annually.

While annual savings of $20.52 million have been estimated, it is unclear as to what overall funding level has to be provided by the Government to the Corporation to yield the annual savings of $20.52 million. It is also unclear as to how these savings are going to be identified and measured to ensure they have been realized. This is especially significant since a portion of the savings are supposed to finance the capital cost of the project.

- The estimated cost of restructuring has changed several times. The initial estimate to restructure the health care services in the St. John’s region was $300 million in 1989. This was revised to $100 million in July 1996 and to $130 million in June 1997.
The Corporation incurred a deficit of $4.8 million in 1996-97. It is also projecting deficits of $6.8 million in 1997-98 and $10 million in 1998-99. As a result, the cumulative deficit of the Corporation for the three-year period is expected to be $21.6 million.

The Corporation was also experiencing problems in maintaining sufficient funds to meet its current obligations. Its cash flow problems are caused primarily by a combination of its deficit, its uncollected accounts, and the timing of the last monthly budget advance from the Department of Health. The Corporation’s overdraft was highest in April 1997 and April 1996. Bank overdrafts for these two months were $10.0 million and $12.1 million respectively.

We had initially intended to compare the Corporation’s original budget, the final revised budget, and the year-end revenues and expenditures to identify the reasons for the Corporation’s deficit of $4.8 million. However, since the information required to complete this analysis was not readily available and because of the frequency and significance of the changes made to the original budget, such an assessment was outside the scope of our review.

In addition, we had also intended to compare salary expenditures for several years with the original and revised salary budgets for those fiscal years to determine whether total salaries paid by the Corporation had increased or decreased over the period. Given the significance of the Corporation’s salary expenditures, and the three downsizing initiatives which occurred over the past three years, this information would indicate whether the total salaries paid by the Corporation had in fact decreased. However, we were unable to obtain the Corporation’s original salary budget for 1996-97, and the original salary budget and actual salary expenditures for 1995-96.

In March 1997, a Budget Review Committee comprised of representatives from the Corporation, the Department of Health and the Treasury Board Secretariat was established to carry out a similar exercise and conduct a comprehensive review of the Corporation’s 1996-97 budget, review its projected costs, identify clinical impacts and prepare a three year budget forecast.

We look forward to the report of the Committee which is expected to be completed near the end of 1997.

As at 31 March 1997, the Corporation had accounts receivable totalling $18.7 million, comprised of $7.9 million from patients, $7.6 million from the Provincial Government, and $3.2 million from other sources. Our review indicated that amounts owing to the Corporation are not being collected on a timely basis. For example, $5.6 million of $7.9 million, or 70% of total patient receivables are over 30 days old. The Corporation also wrote off uncollectible accounts of $633,422 from 1 April 1995 through 31 December 1996 and, at the time of our review, was in the process of finalizing an additional write-off. In November 1996, the Corporation retained the services of a collection agency to assist it in the collection of delinquent accounts. Any amounts owed the Corporation which are determined to be uncollectible, are funded 100% by the Department of Health. As a result, funding by the Department could be decreased if the Corporation collected amounts owing to it.
We reviewed 209 purchases with a dollar value of $29.4 million to determine compliance with the Pubic Tender Act.
The Corporation did not tender for 79 of these purchases with a dollar value of $9.7 million as the were acquired from “the only available source.” These 79 purchases along with another 91 purchases were reported to the Minister of Works, Services and Transportation, between 1 April 1995 and 31 December 1996, as being available from only one source. However, our review disclosed instances where there was insufficient information in the Corporation’s files to fully support why the purchases were not publicly tendered.

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3.22 Newfoundland Cancer Treatment and Research Foundation

The Newfoundland Cancer Treatment and Research Foundation was established in 1971 to conduct a program of cancer diagnosis, treatment and research. The Foundation is governed by an eight member Board of Trustees which is appointed by the Minister of Health. The Foundation operates province wide through clinics and treatment centres within existing health care facilities and also operates the Dr. H. Bliss Murphy Cancer Centre in St. John’s. For the year ended 31 March 1997, total patient visits for the major clinics were reported at 14,598. For this same period, the Foundation reported revenue of $7.8 million, of which 90% was received from the Province, and expenditures of $8.7 million.

On 2 December 1996, the Public Accounts Committee of the House of Assembly passed a resolution requesting that we conduct a review of the financial affairs of the Foundation. Our review covered the period from 1 April 1995 to 31 March 1997. Our report on this review was presented to the Public Accounts Committee on 1 December 1997 and was tabled in the House of Assembly on 2 December 1997. Our review indicated the following.

The Foundation has a combined fund deficit of $957,000 as at 31 March 1997, which includes accumulated vacation and severance pay of $507,000.

The Foundation does not have any authority to incur a deficit.
The Foundation’s annual budget, which provides for the allocation of funding to the various programs, is not approved by the Board.

The Foundation’s annual report is not an accountability document as it is not issued on a timely basis and provides no linkage of results with objectives. In addition, this report is not tabled in the House of Assembly.

The Foundation appoints newly recruited physicians at salary levels in excess of that authorized under the Conditions of Employment for Salaried Physicians in Newfoundland and Labrador without obtaining the required approval from the Department of Health.
We reviewed 23 purchases over $7,500, with a dollar value of $971,511, to assess compliance with the Public Tender Act. One contract, in the amount of $417,500, was not awarded to the lowest bidder meeting tender specifications. In addition, there was no public tender called for another two contracts totalling $19,213. There were no exception reports filed with the Minister of Works, Services and Transportation for these three contracts and thus, these exceptions were not reported in the House of Assembly as required by the Act.

The Foundation did not tender another 11 purchases, totalling $259,250, which were all greater than $7,500. However, for these 11 purchases, the Foundation filed a public tender exception report with the Minister of Works, Services and Transportation. Ten of these reports indicated that the vendor was a sole-source supplier; however, for two of these purchases totalling $102,063, other sources were available and a public tender was therefore required. The other public tender exception report related to a moving company where it was stated that rates did not vary. However, quotations had been obtained and the supplier with the lowest quote was awarded the contract.

We also reviewed 10 purchases under $7,500 where the Public Tender Act requires the purchaser to obtain quotations from 3 suppliers or establish for the circumstance a fair and reasonable price for the goods or services. The Foundation did not obtain quotes for 1 of these 10 purchases.

Board expenditures of $80,211 were charged to the operating account which is funded by the Department of Health.

There is a lack of segregation of incompatible duties over the accounting services provided by the Health Care Corporation of St. John’s on behalf of the Foundation. In addition, monitoring of expenditures by the Foundation is limited to a monthly review of variance reports. As a result of these weaknesses over the approval and monitoring process for expenditures, inappropriate or inaccurate expenditures may not be detected.

There is no capital asset ledger and annual physical counts are not performed. As a result, there is currently no accurate account of the Foundation’s capital assets.

The Foundation does not have adequate insurance coverage over its capital assets due to recent significant capital assets acquisitions.

The Foundation has not established any policies for the hiring of external consultants. Of the five consulting engagements reviewed, totalling $95,095, there were no proposal calls for four of these engagements. In addition, there were no signed written contracts for any of the engagements.
The Foundation has entered into several agreements with universities, hospitals and individuals without obtaining the approval of the Lieutenant- Governor in Council as required under the Newfoundland Cancer Treatment and Research Foundation Act.
The Foundation may only invest money in investments authorized under the Trustee Act. The Foundation invested $58,487 in a mutual fund which is not an authorized investment under the Trustee Act.
Our review disclosed instances where there was no record that the Board was informed of certain activities of the Foundation and other committees of the Board.

The Board often does not have a full membership as appointments to the Board are often delayed for a considerable period.

The Foundation is developing performance indicators that could be used in assessing its performance in relation to predefined objectives.

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3.23 Workers’ Compensation Commission

The Workers’ Compensation Commission was established in 1951. In accordance with the Workers’ Compensation Act and its supporting regulations, the Commission is responsible for administering programs for the payment of benefits to injured workers and dependents, rehabilitation of injured workers, setting rates and collecting employer assessments, and making investments necessary to ensure adequate funding for services. The Commission is governed by a seven member Board comprised of a chairperson, two employer representatives, two worker representatives and two members at large. In addition, there are two ex-officio members – the Chief Executive Officer of the Commission and the Assistant Deputy Minister of the Department of Environment and Labour responsible for Occupational Health and Safety. The Board is appointed by the Lieutenant-Governor in Council. The Commission reports to the House of Assembly through the Minister of Environment and Labour.

The Commission is funded through employer assessments and income earned on investments maintained in an investment portfolio. Of the $122.5 million in total revenue for the 1995 calendar year, 75.5% or $92.5 million came from regular assessments on employers’ payroll to meet current year obligations, 10.9% or $13.4 million came from an additional assessment on employers’ payroll to amortize the unfunded liability and 13.6% or $16.6 million came from the Commission’s investment portfolio. There are approximately 13,000 registered employer accounts representing approximately 180,000 workers covered by Workers’ Compensation programs.

Monies received form an Injury Fund which is used to pay all the expenses of the Commission, expenses of the Department of Environment and Labour for the Occupational Health and Safety Division, the Employer and Worker Advisors, the Statutory Review Committee and all expenses of the Department’s Workers’ Compensation Review Division. The Commission’s total expenditures for the year ended 31 December 1995 were $106.7 million.

Our review of the Commission indicated the following.

The Commission has taken initiatives to strengthen its accountability to the House of Assembly. For the 1995 calendar year, the Commission prepared a report to demonstrate its performance relative to predetermined targets. The report was a good initial effort in providing more useful information to the House of Assembly; however, improvements are required so that all strategic objectives identified by the Commission have predetermined targets against which actual performance is reported.

In 1991, the Commission prepared a financial strategy to address its unfunded liability, which, at that time, had increased to $176 million. There were two significant initiatives implemented to address the unfunded liability. First, a special assessment, currently totalling $13 million annually, was put in place so that the unfunded liability could be fully funded by 2012 and secondly, to reduce the cost of workers’ benefits, the income replacement ratio was reduced from 90% to 75% for the first 39 weeks and to 80% after 39 weeks. As at 31 December 1995, the unfunded liability was $117 million.

As a result of structural changes at the Commission, the staff complement has increased from 166 in 1990 to 223 in 1995. Also, salary costs have increased from $6.1 million in 1990 to $8.8 million in 1995.

Physical security at the Commission requires improvement.

The Commission is providing loans to employees, at prime plus one percent, for the purchase of computer equipment. During 1995, $98,000 in loans were advanced to employees for computer loans. Also in 1995, the Commission provided interest free loans totalling $1,300 to employees to cover the costs of tuition and books for career related training. There is no authority in the Workers’ Compensation Act to provide these loans.

With minor exceptions, the Commission was generally in compliance with the Public Tender Act and Regulations.

The Commission does not have formal guidelines for the hiring of external consultants. Some of the consultants engaged by the Commission have been renewed on an annual basis without any public call for proposal.

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3.24 Newfoundland Legal Aid Commission

The Newfoundland Legal Aid Commission was created under Section 3(1) of the Legal Aid Act and operates under that Act and Regulations. The affairs and operations of the Commission are under the direction of a Board of Commissioners consisting of five members appointed by the Lieutenant-Governor in Council and two ex-officio members, specifically the Deputy Minister of Justice and the Provincial Director of Legal Aid.

The purpose of the Commission is to establish and administer a plan to provide legal aid to residents who qualify under the Legal Aid Act. To obtain legal aid, an individual must complete an application providing a brief description of the legal problem and information on income, expenses and net assets. Each application for legal aid is evaluated in accordance with its legal merit and the applicant’s financial eligibility, as outlined in the Act and Regulations.

Criminal, family and civil legal services are provided at nine area offices throughout the Province. These area offices are located in St. John’s, Corner Brook, Gander, Grand Falls, Carbonear, Clarenville, Marystown, Stephenville and Happy Valley. Each area office is managed by an Area Director who is responsible for the general administration of legal aid in that area.

We completed our review of the Newfoundland Legal Aid Commission in March 1997. Our review indicated the following.

Controls over accounts receivable, totalling $337,322 as at 31 March 1997 (1996 – $301,391), are inadequate and the Commission has not been successful in collecting amounts owing to it. Accounts receivable include credit balances totalling $30,163 (1996 – $25,596), some of which are owing to clients but have not been paid. The Commission could not always provide client files to support the account receivable balances. Funds remain deposited in trust for cases that have been completed. These funds were never transferred from the trust account to the operating account.

The Commission provided a loan to an employee. Public money should not be used for employee loans.

The applicant assessment process is deficient in that income verification is not always documented and intake workers have not been provided with guidelines to determine the reasonableness of certain applicant expenses.

Accountability at the Newfoundland Legal Aid Commission requires improvement. The Commission does not prepare an annual report to show its actual results of operations compared to its objectives and demonstrate its accountability to the Minister, Government or the House of Assembly.

Improvements could be made to the Commission’s management practices. There were instances of non-compliance with the Legal Aid Act and Regulations. For example, the Commission does not always require a determination of expenses and net assets in assessing the financial eligibility of applicants, the Commission does not provide an annual report to the Minister concerning its work and the Commission’s Area Directors do not submit monthly or annual reports to the Provincial Director on the operations of the area offices. The Commission does not have conflict of interest guidelines for the Board and staff. Employee performance evaluations are not completed on a regular basis and employee position descriptions are not in place for all employees.

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3.25 Newco Corporations – Middle Distance Fishing Vessels

The Department of Fisheries began a program in the late 1970’s to evaluate the use of fixed-gear technology on mid-size vessels in the Newfoundland groundfish fishery. During 1987, the program was expanded with the construction, by Marystown Shipyard Limited, of two middle distance fishing vessels, the Funk Island Banker and Belle Isle Banker, that were specifically designed for Newfoundland conditions. As a result of a financing arrangement between the Province and a leasing company, the two vessels were purchased by Roylease Limited and leased back to the Province through two companies, Newco I and Newco II, which were created under the Corporations Act.

During 1988 and 1989 the program was further expanded with the construction, by Marystown Shipyard Limited, of two additional middle distance fishing vessels, the Makkovik Banker and Nain Banker. This time, the two vessels were purchased by Pitney Bowes Limited and leased back to the Province through two companies, Newco III and Newco IV, which were created under the Corporations Act.

The Province, through senior Government officials, held an 85% ownership interest in each of the four Newco corporations.

The Province’s involvement with the Newco corporations is estimated to cost approximately $31.1 million to 31 March 1997. As at 31 March 1997, the Province was owed $5.6 million by Newco IV Corporation. The Province has also guaranteed the lease payments of Newco IV which have a principal balance of $3.0 million at 31 March 1997. In addition, the Province has written off $15.3 million dollars in advances and related interest charges to the Newco corporations and lost $7.2 million on the sale of the three middle distance vessels.

The remaining middle distance fishing vessel, the Nain Banker, was leased to a private interest under a one-year agreement commencing in April 1997. The agreement provides the operator with an option to enter into negotiations to purchase the vessel within the term of the agreement. There is also an option to extend the existing agreement for an additional one-year term.

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3.26 Town of Pouch Cove

On 13 February 1997, the Public Accounts Committee of the House of Assembly passed a resolution requesting that we carry out a review of the administrative and financial operations of the Town of Pouch Cove. We commenced our review in February 1997 and the review covered the period from 15 November 1993 to 27 February 1997.

Our report on this review, together with Council’s response, was presented to the Public Accounts Committee on 28 August 1997 and was tabled in the House of Assembly on 4 September 1997. Our review indicated the following.

Council contravened the Municipalities Act by not approving the stipends paid to Councillors. Other payments to Councillors for reimbursement of personal expenses incurred in the conduct of municipal business were not always made in accordance with the Municipalities Councillor Remuneration and Reimbursement Regulations. We also identified 13 instances where Councillors were in a conflict of interest.
The Town’s cash management practices were inadequate. For example, deposits were not made on a timely basis. During the period of our review, cash shortages totalling $4,786 were identified. There may be other cash shortages caused as a result of unauthorized account adjustments, inadequate documentation, inadequate controls and a lack of a management trail.

In addition, of $141,101 in adjustments and write-offs to tax accounts, only $17,261 was approved by Council as required under the Municipalities Act.

Controls over payments and purchases require improvement. Payments were made in contravention of The Public Tender Act and the Municipalities Act and Council did not receive information on a regular basis to monitor actual expenditures in relation to its approved budget. We could not locate documentation to support the payment of 1,174 hours of overtime costing approximately $14,000.
Capital expenditures of the Town were not always made in accordance with The Public Tender Act or the Municipalities Act. The Guidelines issued by the Department of Municipal and Provincial Affairs under the financing programs used to fund the Town’s road paving and water and sewage projects were not always followed by the Town.

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Chapter 4

Update on Prior Years’ Report Items

This year we continued a process whereby the recommendations are monitored and the results reported within two years of the original report date. This chapter provides the results of this monitoring process relating to the recommendations contained in the Reports of the Auditor General to the House of Assembly on Reviews of Departments and Crown Agencies for the Years Ended 31 March 1994 and 1995.

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Table of Contents

Preface

Introduction

Chapter 1

Chapter 2

Chapter 3

Chapter 4

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