1998 April Report of the Auditor General of Canada

Main Points

1.1 Expenditure and work force reductions have affected the public service and public servants for more than a decade. In 1995, the government launched Program Review, an initiative aimed at rethinking and realigning government programs in light of fiscal restraints.

1.2 To better manage expenditure and work force reductions, central agencies moved from imposing, directing and prescribing to providing leadership, guidance and support to departments. For example, instead of adopting the "one size fits all" approach, Treasury Board Secretariat proposed a management and accountability framework to departments and allowed incentive programs to take into account the differences in their context and operational environment.

1.3 Program Review was a success from many perspectives. The deficit has been reduced and personnel costs have decreased for the first time in more than a decade. In spite of a difficult climate, reductions were implemented without major work disruptions; and financial departure incentives have been effective in minimizing layoffs.

1.4 The cost of achieving work force reductions was high, however, not only in dollar terms but in human terms as well. For example, between 1992 and 1997 the government paid incentives to some 46,000 public servants, military and RCMP members to leave or retire. Furthermore, work force reductions have amplified a number of human resource issues, such as the need for rejuvenation and renewal and the need to modernize and simplify human resource systems. Many studies and our own audit work indicate that the public service is an institution under significant stress and that strong actions are now required.

1.5 Significant improvements were made in the management framework put in place by central agencies. Nonetheless, more efforts are needed to improve the management of work force reductions - for example, in critical occupational groups where there might be surpluses in some departments but shortages in others.

1.6 There is a need to improve accountability to Parliament for expenditure and work force reductions, and for the related costs. Roles, responsibilities and accountabilities of central agencies and departments in the management of work force reductions also need to be clarified.

Introduction

Deficits, Fiscal Restraints and Work Force Adjustments

1.7 From the end of the Second World War to the early 1970s, the Canadian economy grew considerably. The growth in the range of social and economic activities of the government significantly increased the size of the public service. One exception was the period from 1958 to 1963, when Canada faced a recession that resulted in sustained deficits and a number of restraint measures, such as freezes on public service hiring.

1.8 In the 1970s, increases in government spending and events such as rising oil prices and interest rates, the resulting slowdown of the economy, the indexation of social programs and the de-indexation of tax made deficits a continuing feature of federal budgets. Recurrent deficits led to a series of restraint measures, including:

• a decision in 1985 to reduce the size of the public service by 15,000 person-years over five years (person-year was the indicator the government used at the time to measure the "consumption" of labour);
• decisions starting in 1991 to reduce the size of the Department of National Defence from 84,000 to 60,000 military members, and a decision in 1994 to reduce its civilian work force from 36,000 to 20,000, both reductions to be achieved by March 1999;
• the freezing of salaries and the suspension of collective bargaining for six years starting in 1991;
• the transfer of the administration of transportation facilities, such as airports, to local authorities starting in 1992;
• a comprehensive reorganization in June and November 1993 that reduced the number of departments from 35 to 23, along with a requirement to significantly reduce administrative costs.

Exhibit 1.1 presents key restraint measures and others introduced over some 30 years that impacted on the size of the public service or otherwise affected public servants.

1.9 To minimize layoffs by redeploying public servants touched by restraint measures, in the 1960s the government approved the Work Force Adjustment Policy. In 1985, it began to use financial incentives to achieve work force reductions by enticing public servants to leave the public service voluntarily. The Policy (renamed the Work Force Adjustment Directive in 1991) and related incentives were modified periodically. One significant modification in 1991 added a clause guaranteeing a "reasonable job offer" to surplus public servants before they could be laid off. "Reasonable job offer" was defined in terms of salary level as well as distance from the employee's work location. Public service unions viewed the "reasonable job offer" guarantee as tantamount to job security.

1.10 To deal with situations that it believed could not be accommodated under the Work Force Adjustment Directive, the government introduced other directives and departure incentive programs over the years. In 1992, for example, the first of several Force Reduction Programs was approved for the Department of National Defence. It allowed for the cash payment of special leave to non-commissioned members in overstaffed military occupational groups who volunteered to leave. Also in 1992, the government approved the Executive Employment Transition Policy because it was felt that executives could not be guaranteed a "reasonable job offer". In 1994, the Civilian Reduction Program was approved to permit the Department of National Defence to deal with the reduction of its civilian work force due notably to base closures.

1.11 In spite of all the measures announced by governments, in the '80s and early '90s expenditures continued to increase. This led to deficits reaching alarming proportions. A consensus was emerging that the fiscal situation called for different and more drastic measures.

On the Verge of a Crisis: Program Review and Other Reviews

1.12 Program Review focussed on realigning programs in light of fiscal constraints. In 1994, a number of factors threatened the deficit target of three percent of GDP that the government had committed itself to achieve by 1996-97. The unstable fiscal situation meant that initiatives under way took on greater importance. Under the umbrella of a renewal initiative called "Getting Government Right", the government launched a number of reviews. One of these was Program Review, which consisted of the scrutiny and review of "program spending" (non-statutory spending representing some $50 billion of government expenditures out of a total of some $160 billion) and a re-examination of the federal government's role and responsibilities in delivering those programs.

1.13 Program Review asked ministers and their officials to submit programs to a test of six primary questions:

• Does the program or activity continue to serve a public interest? (public interest test)
• Is there a legitimate and necessary role for the government in this program area or activity? (role of government test)
• Is the current role of the federal government in this program a candidate for realignment with the provinces? (federalism test)
• What activities or programs should or could be transferred in whole or in part to the private or the "voluntary" sector?(partnership test)
• If the program or activity continues, how could its efficiency be improved? (efficiency test)
• Is the resultant package of programs and activities affordable within fiscal restraint and, if not, what programs or activities should be abandoned? (affordability test)

1.14 To assist ministers and departments, programs were assigned "notional" centrally established fiscal targets for expenditure reduction over three years. These were targets that the Department of Finance, assisted by the Treasury Board Secretariat, estimated would have to be met for the government to reach its overall fiscal objective. Central ministerial and deputy ministerial committees were set up and tasked with the responsibility of reviewing plans prepared by individual ministers and their officials. A Secretariat was created in the Privy Council Office to support the work of the committees and advise departments on their plans. Recommendations and decisions on programs that had been reviewed were reflected in the 1995 Budget.

1.15 The Minister of Finance announced in February 1995 that Program Review would result in some $17 billion in expenditure reductions over three years. This would contribute to a net reduction of $9.8 billion in federal departmental spending levels between 1994-95 and 1997-98. Many departments saw their spending levels cut by 20 percent or more. It was also announced that Program Review and other reviews, such as policy reviews, would result in structural changes to the public service - for example, the commercialization of air navigation services, the privatization of the Canada Communication Group, the creation of new agencies like the Canadian Food Inspection Agency and others, and the abolition or restructuring of some 120 government agencies. It was estimated that by 1997-98 such measures would reduce the public sector work force, including National Defence and the RCMP, by as much as 45,000.

1.16 Special incentive programs introduced. Among other measures to facilitate departments' implementation of Program Review and other expenditure reduction decisions, and to minimize involuntary layoffs, the government approved for parts of its work force two special departure incentive programs for a three-year period to end in 1998: the Early Retirement Incentive program and the Early Departure Incentive program. The Early Departure Incentive was offered in exchange for a three-year suspension of the "reasonable job offer" in the "most affected departments". To be declared "most affected" by Treasury Board, departments had to be unable to meet their work force reductions under the Work Force Adjustment Directive and other existing management measures.

1.17 In February 1995, the government stated that the "cost of the cash-based early departure incentives" would be about $1 billion. Appendix A summarizes key departure incentive programs used over the years to entice surplus military members, RCMP members or public servants to voluntarily retire or leave.

1.18 Program Review Phase II. By September 1995 there was a general perception that still more could be achieved. Given this perception, and the need to meet further fiscal targets, the government launched Program Review Phase II. However, departments were informed that decisions reached in the first phase of Program Review would not, as a rule, be revisited.

1.19 In the 1996 Budget, the Minister of Finance estimated that Program Review II would result in further expenditure reductions of some $2 billion by 1998-99. Significant structural changes would also occur through the devolution, privatization or commercialization of government activities, such as the devolution of harbour administration to local authorities. It was estimated that possibly 10,000 jobs would be eliminated, in addition to the previously estimated 45,000 to be affected under Program Review I.

Previous Audit Work Performed by the Office

1.20 In November 1992 this Office reported to Parliament the results of an audit of payments made to employees under the Work Force Adjustment Policy (later Directive) from 1986 to December 1991, before the inclusion of the "reasonable job offer" guarantee. We reported that while some departments had managed to reduce their work force cost-effectively, others had not managed payments to employees with the same due regard to cost effectiveness. We also noted that payments had been used for reasons other than those specified in the Policy.

1.21 The Office concluded that central funding, inadequate information and ineffective controls in central agencies and departments had led to a gradual deterioration in the management of financial incentives. Many public servants perceived such incentives as normal entitlements upon retirement or upon leaving the public service. In our 1994 follow-up, we reported that a number of initiatives aimed at addressing those issues were at various stages of implementation.

Focus of the Audit

1.22 The objectives of our audit were:

• to determine the extent to which announced targets for expenditure reduction or, where specified, work force reduction have been or are likely to be achieved;
• to identify the cost of work force reductions and determine the extent to which the initiatives resulted in savings;
• to assess the extent to which departure incentive programs were managed in accordance with relevant policies, directives or guidelines; and
• to identify lessons learned for possible application in the future.

1.23 This chapter reviews the evolution of expenditure and work force reductions over the years and provides a global assessment of the results, with an emphasis on the management of expenditure and work force reductions announced since 1995, pursuant to Program Review and related initiatives. It focusses on central agencies (Department of Finance, the Treasury Board Secretariat and the Privy Council Office) and the extent to which they provided clear direction to departments or put in place a management and accountability framework for cost-effective implementation of reductions and for achievement of overall results. Chapter 2 examines the implementation of expenditure and work force reductions in a number of departments. We did not examine the merits of the specific decisions resulting from Program Review; also excluded was any evaluation of the impact of work force reductions on individuals laid off. Further details on the audit objectives, scope, criteria and approach are presented in About the Audit at the end of Chapter 2 .

Observations

Different Approaches Yield Different Results

1.24 Over the last three decades, governments have used different approaches to wrestle the deficit and reduce the size of the public service, with varying degrees of success.

1.25 Historically, the response to deficits was simple: let's reduce, cap or limit the growth of expenditures until revenues catch up. The underlying assumption was that deficits were an aberration that would not last. Staffing or salary freezes and across-the-board expenditures and work force reductions are examples of this kind of response. Our review of best downsizing practices revealed that such approaches generally do not result in long-term benefits, as shown by attempts in the late 1970s and mid-1980s to reduce the public service, and by efforts to reduce the size of the executive cadre. Over time, because such reductions are not anchored to changes in structures and work processes or to decisions to abandon or transfer activities, staff levels are likely to go back to former levels, if not higher.

1.26 The second approach used by governments to tackle deficits and reduce expenditures over the years has been "rationalization". Reorganizing, streamlining, re-engineering or implementing "total quality" concepts are examples. Public Service 2000, the 1993 restructuring and reorganization of the government, and the Blueprint for Renewing Government Services Using Information Technology of 1994 are specific "rationalization" measures taken by the federal government. The underlying assumption is that efficiency gains will help to improve or redress the fiscal situation. What the experience of the public service shows, however, is that rationalization takes time to produce efficiency gains, that efficiency gains may not materialize if projects fail, or that the gains may not be as high as anticipated. Furthermore, rationalization efforts often require additional resources at the front end because operations must continue while the desired transformation is being planned, developed and tested. In the meantime, moreover, the fiscal situation may continue to deteriorate, as federal deficits did in the early nineties. If achieved, however, efficiency gains resulting from rationalization efforts can be long-lasting. In such instances, downsizing is likely to be more permanent although a large number of low-paid jobs may be replaced by higher-paid but fewer jobs.

1.27 The third approach used by governments has been to realign or "rethink" programs with a view to making government more economical, effective and efficient (as the 1984 Nielsen Task Force undertook to do). The underlying assumption is that some activities need to be terminated or transferred and some assets sold in order to protect others judged more important or valuable. The issue is the role of the government, and one of the deciding factors is the capacity to pay. Examples are the devolution of airports and harbours and the privatization of Crown corporations. In such instances, although other issues may arise - the issue of accountability, for example - work force reductions are more likely to be permanent since the government no longer performs the function.

1.28 The importance of selecting the right target. Over the last two decades, attempts by government to reduce expenditures and the size of the public service have focussed on person-years, positions, indeterminate employees, reporting levels or salary expenditures. Exhibit 1.2 shows that from 1985 to 1995, attempts at reducing personnel costs - such as salary freezes or the 15,000 person-year reduction announced in 1985 - have not succeeded in producing a downward trend in those expenditures; year after year, personnel costs continued to increase, although at a lower rate. Some of the reasons for the slow but continued yearly growth include the introduction of new programs, resulting in hiring that offset work force reductions made in other programs; the increased professionalization of the public service; and cash payments made to employees under various incentive programs.

1.29 Such results demonstrate the importance of choosing the right target and of deciding what, in the end, should be measured. For example, because the focus from 1985 to 1991 was on person-year reductions, there was an increase in forms of employment not subject to person-year controls - such as temporary assistance - even though this was not necessarily cost-effective. For lasting results, the target selected must be sufficiently encompassing to permit managers to make cost-effective choices, such as the most appropriate mix of resources required, and it must be driven by permanent changes in structures, work processes or the nature of programs or activities.

Program Review: Significantly Different from Previous Initiatives

1.30 Our audit work in departments, our review of documentation and our interviews with current or former senior officials reveal that there were significant differences between Program Review and previous attempts to reduce expenditures or the work force (see Exhibit 1.3 ). Some of the most significant factors that distinguished Program Review include the following:

• From a central agency perspective, Program Review focussed exclusively on reducing expenditures, not staff levels. It was not the government's objective to reduce the public sector by some 55,000 employees. That number illustrated the magnitude of the impact of the expenditure reduction targets.
• There was a strong resolve at the political level to achieve the deficit target of three percent of GDP and the required expenditure reductions, because there was a broad recognition of the need for urgent action. The credibility of the government in relation to its commitment was at stake.
• Expenditure reductions could be strategic and selective because there were clear, logical and easy-to-understand criteria for the review and prioritization of programs and for making decisions about expenditure reductions.
• Ministers and departmental officials were key players. They were given the responsibility and the flexibility to propose specific areas where revenues could be generated or where expenditures could be reduced in light of overall fiscal targets.
• Ministers and their officials were made more aware of the need to rethink and redesign programs and services and to be innovative because at the outset, "notional" targets and the three-year horizon gave a better appreciation of the magnitude of the total effort required of them.
• Departments were given three years to implement Program Review I and II decisions, with the assurance of some stability in funding. As a general rule, decisions flowing from Program Review I were not revisited.

1.31 A number of areas nevertheless presented challenges or difficulties. The most significant included the following:

• The time frame between the launching of Program Review in May 1994 and the deadline for departments to submit plans (August 1994) was very short. Partly as a result, the "affordability test" was the determining factor driving proposals and eventually decisions. There was not much time for analyzing in detail the potential impact of the cuts proposed.
• Differences in planning assumptions and in the information available at the central agency level and that available in some departments led to sometimes lengthy discussions about the numbers to be used as a base for making expenditure reductions and for setting fiscal targets.
• The responsibility for raising horizontal issues was left mostly with departments. A number of horizontal issues were raised, and some - like the consolidation of responsibilities for food inspection - were resolved. However, other issues were not raised or could not be resolved, like the presence of many government departments in international affairs and in our embassies instead of a more centralized approach, and the roles and responsibilities of central agencies in the governance of the public service and in human resource management. Exhibit 1.4 illustrates some of the challenges or difficulties associated with Program Review.

The Management and Accountability Framework at the Centre: Significant Improvements

1.32 The changing role of central agencies. Another factor in the difference between previous attempts to reduce expenditures and Program Review has been the changing role of central agencies. For example, central agencies moved from imposing, directing and prescribing to providing leadership, guidance and support to departments, which were made responsible for deciding how and where expenditure reduction would be implemented. Central agencies managed the Program Review process and, within the boundaries of notional targets, they provided peer review guidance and advice to departments. Furthermore, instead of adopting the "one size fits all" approach of the past, Treasury Board allowed incentive programs to take into account the differences in the context and operational environment of departments. If they felt the need, for example, departments could ask to be declared a "most affected department". In March 1995, 11 departments and agencies were designated "most affected departments". As of March 1997, there were 17 such departments and agencies.

1.33 A number of tools and mechanisms were put in place. In response to our 1992 Report chapter, which was critical of the management and administrative frameworks at both the central agency and the departmental levels, the Treasury Board Secretariat developed an accountability framework for the management of work force adjustments as well as a number of measures and tools. The tools include, for example, a manager's guide and an audit guide on work force adjustments. Periodically, guidelines and clarification were issued dealing with areas such as post-employment or contracting with former public servants.

1.34 Committees were created, including union-management committees. A number of committees were created such as the National Joint Adjustment Steering Committee; the Committee of Departmental Work Force Adjustment Co-ordinators; and the Joint Adjustment Committees composed of management and union representatives. The purpose was to ensure a better management of work force reductions across the public service. Our interviews and a review of their activities revealed that Joint Adjustment Committees, especially outside the National Capital Region, have greatly facilitated the placement or relocation of public servants. For a number of reasons, this mechanism has not worked as well in the National Capital Region. We noted that Joint Adjustment Committees outside the National Capital Region have facilitated the application across departments of the alternation process (also known as "swapping"). This process permits public servants who want to retire or leave the public service to switch jobs, subject to management approval, with employees who have been declared "affected" but wish to remain in the public service. Since 1995, some 2,600 "swappings" have been reported by Joint Adjustment Committees. People we interviewed who have been associated with the work of these committees said that it has improved union-management relationships significantly; in their view, this concept could be used to address other human resource issues, such as training and mobility.

1.35 A management and accountability framework was proposed to departments. In December 1995, the Treasury Board Secretariat proposed a management and accountability framework to assist departments in the prudent and cost-effective management of the Early Retirement, Early Departure and other incentive programs and related expenditures. Included in this framework was a requirement for an audit of the administration of the program in midcourse and the provision of accurate, accessible, timely and reliable information, as well as a monitoring framework aimed at ensuring that incentive programs were contributing to departments' progress toward targets set out in their Business Plans. Other objectives of the framework were to ensure probity and compliance and the monitoring of equity issues that might arise from disproportionate job cuts across occupational or demographic groups. Although some Treasury Board Secretariat officials had suggested that formal agreements with departments would ensure greater accountability, this suggestion was not accepted. It was perceived to be inconsistent with the approach used for Program Review, which was to make departments responsible and accountable for deciding on and implementing expenditure reductions as they considered appropriate in their context.

1.36 A test of cost effectiveness: "payback". One of the key features of the management and accountability framework was the cost-effectiveness test known as "payback", which is somewhat akin to the concept of "return on investment". The Treasury Board Secretariat wanted to ensure by introducing the payback concept that departure incentives would result in downward trends in salary, wages and benefits and that the costs associated with incentives would not be higher than the overall reduction in salary, wages and benefits. As initially defined by Treasury Board Secretariat, payback is the relationship between the costs associated with departure incentive programs and the reduction in salary wages and benefits during Program Review. The costs are to be measured from April 1995 to September 1998 and the reduction generated is to be measured from April 1995 to March 1999.

1.37 The cost portion of the equation used to calculate payback is defined as the incremental costs associated with departure incentive programs but excluding payments for severance and vacation pay. It also includes the cost of the pension waiver for the Early Retirement Incentive program. The other portion of the equation is determined by the reduction in salary, wages and benefits after four years. In January 1998, the Treasury Board Secretariat estimated that incremental costs associated with departure incentive programs ($3.2 billion) will exceed the net reduction in salary, wages and benefits ($2.5 billion) at the end of Program Review in March 1999. This is partly due to the lower than expected take-up rate for the Early Departure Incentive and the higher than expected take-up rate for the more expensive Early Retirement Incentive. Treasury Board Secretariat officials had initially estimated that some 4,000 individuals would opt for early retirement; as of March 1997 the number was about 8,000. Some of the reasons for this variation include the introduction of the alternation process (paragraph 1.34), the suspension, for three years, of the 15-week separation benefit as of 15 July 1995 and additional reductions under Program Review II. While officials had estimated that between 13,000 and 15,000 individuals would opt for the Early Departure Incentive where offered, only some 7,500 surplus employees had done so as of March 1997. As part of its monitoring, Treasury Board Secretariat calculated payback for departments and agencies whose departure cost estimates had changed significantly from earlier projections. In calculating payback, the Secretariat refined its initial definition of expenditure reductions to include changes in the employer's contribution to employee benefit plans. This has resulted in a series of discussions with departments about the methodology used and the usefulness of payback as in indicator.

1.38 We believe that in its concept, payback is not only sound but also essential; we acknowledge the efforts of the Treasury Board Secretariat to provide departments with such a tool. The introduction of this concept was consistent with best practices and with comments we made in our 1992 Report. At that time, we noted that one of the reasons why payments to employees under the Work Force Adjustment Policy were not managed cost-effectively was that managers had no information about the total cost to the taxpayer of such incentives. Individual decisions to grant the incentives simply did not take costs into consideration. In our opinion, a cost effectiveness indicator or measure such as payback can, when effectively designed, provide additional information to a decision to grant departure incentives, while providing managers with strong motivation to give more attention to the need for balancing costs and savings.

1.39 Nonetheless, to improve payback as a monitoring tool and as a measure of cost effectiveness, in our opinion a number of issues in its design and application need to be addressed to make it more relevant and more useful:

• Payback is essentially a financial indicator and is very limited in its ability to provide an assessment of the overall quality of the management of incentive programs; other factors or indicators must also be taken into account. In their own midterm reviews and in the course of our audit, departments raised concerns about the applicability of payback as a measure of cost effectiveness.
• Introducing payback at the same time as the incentive programs would have made managers more aware of the necessity to balance costs and savings. We noted that payback was formally introduced in December 1995, months after departments had approved incentives for a significant number of employees.
• To be held accountable for the prudent and cost-effective management of incentive programs, departments would have needed an understanding and acceptance of the objective, purpose and parameters of payback before it was formally introduced. Our examination of departmental midterm review reports indicates that the application and usefulness of payback were not always well understood.
• The relationship between the costs of incentive programs and the savings they directly generate needs to be clear. As currently calculated, payback makes no distinction between reductions in salary and wages generated by each of the departure incentive programs and those generated by natural attrition, the creation of alternative delivery mechanisms, and the transfer or privatization of activities. Nor is it clear whether the basis used to calculate reductions in salary wages and benefits should be the "net method" - the reduction in salary and wages between the end of Program Review and the beginning; or the "cumulative method", in which reductions incurred in each year are cumulated until the end of the period; or the "global method" where reductions in salary, wages and benefits are considered in the context of reductions in overall expenditures. How one defines and calculates reduction in salary and wages can impact significantly on the way one interprets the cost effectiveness of work force reductions during and after Program Review.
• In the calculation of payback, a mechanism is needed to recognize increases in salary and wages resulting from new program initiatives that, if not taken into consideration, may offset the reduction in salary and wages and result in a longer payback period than expected.
• Some significant incremental costs associated with, or arising from, work force reductions need to be factored in. For example, incremental severance paid to employees because severance entitlements are higher for employees whose service is terminated than for those who leave of their own volition should be included, because they can be significant (Appendix A) . In our 1997 chapter, Transport Canada - The Commercialization of the Air Navigation System, we estimated that 28 percent or $31.5 million of the total estimated $112 million in severance costs were because severance was paid out at the layoff rate.
• If payback is to be calculated over a set period of time, as it is now, the impact of the timing of incentive payments on the ability to generate a reduction in salary wages and benefits within that period needs to be considered.

1.40 Information needs to be improved further. In response to our 1992 audit and our follow-up in 1994, the Treasury Board Secretariat and the Public Service Commission made efforts to improve central information systems so the administration of the various financial incentives could be monitored more effectively. The quality of information has improved, but we found in particular that the reconciliation and consolidation of departure incentive information - such as costs of incentives and numbers of recipients, originating from a variety of sources - need to be improved to provide for more effective monitoring and improved accountability.

1.41 Some of the difficulties we have noted are structural. For example, the Department of Finance's responsibilities in the budgetary process and the Treasury Board's responsibilities for financial management apply to the public sector as a whole, which includes more than 90 entities (including military personnel and RCMP members). Treasury Board's responsibilities as the Employer apply only to the public service, which includes some 60 organizations (and excludes military personnel and RCMP members). In other words, some agencies or categories of personnel are included in one universe but not in the other. As a result, information on the costs of incentives that appears in the Public Accounts and the Financial Statements of the Government of Canada cannot be reconciled easily with information reported by Treasury Board on the number of incentive recipients and on public service work force reductions. Moreover, the universe of the Public Service Commission, the agency responsible for assisting departments with the placement or redeployment of surplus employees, is different yet again. Finally, information on the costs of downsizing that was initially contained in the Public Accounts as a Note to the Financial Statements was not included for 1996-97. It is thus difficult to obtain a comprehensive picture of expenditure and work force reductions and the associated costs in the public service and in the broader public sector. Appendix B presents a schematic view of the work that was required to reconcile and analyze information for the purpose of this audit.

1.42 There are other difficulties with the purpose, sources and timing of the information. For example, the Comptroller General obtains information on incentive recipients directly from departments, while the Human Resources branch of the Treasury Board Secretariat extracts information on recipients from central information systems such as the pay system. For the seven departments we selected for a more detailed examination (see Chapter 2), the discrepancy between the information available in the department and the information available to the Treasury Board Secretariat from March 1995 to March 1997 was eight percent or more. No reconciliation of these numbers has been performed.

1.43 Little or no information available in Performance Reports of departments or central agencies. We reviewed a sample of departmental and central agency Performance Reports for the year ending 31 March 1997. We found that they provide Parliament with little or no information on the extent to which incentives have been used, their costs, and savings that resulted.

1.44 Consistent with the views expressed in our 1994 Report chapter, Information to Parliament, we believe that expenditure and work force reduction initiatives lend themselves to a special report that would provide information on costs, savings, staff affected and so on for the government as a whole, and for the public service.

1.45 We believe that overall, in spite of the shortcomings we have noted, the framework put in place by central agencies to assist departments in managing and administering work force reductions and departure incentive programs in a cost-effective way represents a significant improvement over the situation in 1992, when central agencies and departments had conducted relatively few audits, reviews or evaluations of the management of work force adjustments. Since 1995, some 50 audits or reviews have been carried out on behalf of the Treasury Board Secretariat or by departments, covering various aspects of expenditure and work force reductions, including the use of incentives. Treasury Board Secretariat officials have informed us that in their opinion, the issues raised in audits or in midterm reviews did not warrant any specific intervention by the Secretariat. More details on the results of such audits or reviews are presented in Chapter 2.

Results Achieved and Some of the Impacts

1.46 The deficit has been reduced. It has been reported and we have attested that the deficit in 1996-97 was at some $8.9 billion. This represented 1.1 percent of the GDP. The government recognizes that along with restraint measures, good performance by the Canadian economy and low interest rates have contributed significantly to this achievement. In the February 1998 Budget speech, the Minister of Finance stated that he expected there would be no deficit for 1997-98, and committed the government to zero deficit for the next two years.

1.47 Reasonable assurance that the government has met or is likely to meet the expenditure reduction targets of Program Review. Information contained in the Public Accounts, provided by the government from time to time, or obtained from central agencies and departments that we have audited leads us to a reasonable assurance that, as of March 1997, departments either have met the expenditure reduction targets of Program Review or, assuming no change in expenditures, are likely to meet them in the future. One of the reasons for this assurance is that Program Review expenditure reductions are taken out of departmental budgets at the start of each fiscal year. Another reason is that central agencies have in place a complex tracking system to ensure that expenditure reduction targets flowing from Program Review are met. It must be recognized, however, that the funding of new activities will make it a complex task to compare departmental budgets at the end of Program Review in 1998-99 with those of the base year (1994-95) - as was the case in March 1997, when ministers had to provide explanations to Parliament for why overall government expenditures were higher than previously stated targets.

1.48 The salary and wages envelope has been significantly reduced. For the first time in over a decade, total personnel costs were reduced in 1995-96 and in 1996-97 by a total of some $3.8 billion, which includes year-end reconciling items. As shown in Exhibit 1.5 , however, the salary and wages portion of personnel costs was reduced by $1.6 billion over the same period. Although the major portion of the reduction in salary and wages was the result of work force reductions, as previously mentioned, the amount also includes reductions due to natural attrition and employees transferred out of the public sector, and the effect of salary/wages paid to new employees hired during the same period (paragraph 1.39). According to the government, as of March 1997, the incremental costs of departure incentive programs represented some $1.8 billion (Exhibit 1.6) .

1.49 Financial incentives: contributing significantly to the reduction of the work force, but generous overall. Between February 1992 and March 1997, some 46,000 individuals, including military and RCMP members, benefited from various departure incentive programs (Exhibit 1.7) . We found in general that incentives offered by the federal government under various programs were relatively generous. For example, research indicates that termination benefits given by some Canadian organizations in the public and private sectors include an average maximum up-front cash payment equivalent ranging from 36 to 59 weeks' salary. In the federal government, they tend to be higher (Appendix A) .

1.50 Our conclusion about the relative generosity of incentives must be balanced by a number of mitigating circumstances and factors that influenced the design and the level of benefits offered. These include:

• the "premium" that had to be paid for the suspension of the guarantee of a "reasonable job offer" granted in 1991 and for the fact that, when first imposed, salary freezes were presented as protection against layoffs;
• the strong desire expressed by Treasury Board ministers to maintain labour peace within the public service, to treat employees in a humane and sensitive manner, and to use the labour bargaining process to arrive at a negotiated settlement if possible;
• the desire to reduce the public service by means other than involuntary termination, so as to minimize layoffs. According to experts, incentives designed for voluntary termination tend to be more generous;
• the foreseen magnitude of the downsizing. Generally, according to research, the higher the number of employees to be terminated, the more generous the severance programs tend to be, particularly in a unionized setting;
• the poor prospect of re-employment for certain employees, due to lack of transferable skills or to other constraints such as working in communities where there is little or no possibility of federal or other employment. Coupled with the desire to treat all employees equally across Canada, this resulted in decisions to use the lowest common denominator in determining the incentives;
• the effect that the incentive programs have on each other, given that there are several programs and that they were introduced or reviewed at different times.

1.51 Our review of best practices also indicates that there are significant differences between the federal public service and the private sector as well as other public services in the way incentives have been used. For example, in some other sectors, financial incentives for voluntary termination are offered for relatively shorter periods of time, after which they become unavailable. This encourages targeted employees to retire or leave as soon as possible, which maximizes payroll savings and minimizes the disruptive effects of downsizing on the organization and its remaining employees. It also avoids creating expectations among employees that such benefits will be normal entitlements upon departure or retirement.

1.52 A significant increase over the estimated cost of incentive programs. In the 1994-95 Public Accounts, the government recorded an allowance of $2.3 billion for costs of Public Service Restructuring over the next three years, to reflect incremental costs for the cash portion of departure incentive programs and the required adjustment to pension liabilities. In the 1995-96 Public Accounts, the government re-estimated its total costs at $3.0 billion. In 1996-97 the total costs were again revised to $3.2 billion. Of this amount, $1.8 billion is for adjustments to pension liabilities.

1.53 It is not possible to measure the precise extent to which incentives have contributed to savings. The difficulties we have noted - tracking expenditure reductions over a four-year period during which the expenditure base changed significantly, and deficiencies in the design and application of payback and the reporting structure - inhibits a rigorous assessment of the direct contribution the various incentives have made to expenditure reductions in salary and wages.

1.54 The public service has been reduced significantly. According to the Treasury Board Secretariat, from March 1995 to March 1997 the public service (excluding military personnel and RCMP members) saw a net reduction of over 31,000 employees, from 225,619 to 194,396 - a reduction of about 14 percent (see Exhibit 1.8) . The number of indeterminate (permanent) employees has been reduced from 194,733 to 164,111, a reduction of more than 30,600 or 16 percent.

1.55 The profile of the public service has changed considerably. Our review revealed that some occupational groups have been significantly affected by work force reductions, as shown in Exhibit 1.9 . The exhibit shows the population of indeterminate employees in each group at March 1995 and March 1997, the net reduction, and the number of incentives paid to employees in the group. It must be noted that work force reductions may affect some departments more than others. For example, as noted in Chapter 2, indeterminate science and technology personnel were reduced in Natural Resources Canada and Environment Canada by 23 percent.

1.56 Because of the reported effects of the "brain drain" and shortages in some occupational groups, we have reviewed the use of incentives in the Auditor (AU), Computer System (CS) and Executive (EX) groups to determine the impact on the profile of the group, on natural attrition and the total separation rate (normal attrition and departures with incentives). Separate employers were excluded from our review because they often use different occupational groupings. Exhibit 1.10 provides details of our findings.

1.57 The results of our reviews lead us to conclude that incentives have had a negative impact on natural attrition among executives and computer specialists but not among auditors, although the total separation rate was relatively high. This leads us to believe that the management of work force reductions for critical occupational groups such as Computer System or Executive, where there are shortages in some departments and surpluses in others, may require a more global approach than is used for core occupational groups in any department. For example, the basis for declaring an employee surplus in critical occupational groups could be the lack of work overall, instead of in a specific department. Perhaps special interdepartmental mechanisms could be created to manage the process for critical occupational groups. As mentioned earlier, Joint Adjustment Committees have facilitated the placement of surplus employees among departments in the regions, but this mechanism was less effective in the National Capital Region.

1.58 The age structure of the public service has also been affected considerably, although the average age has remained substantially unchanged. As a group, the public service is now more middle-aged, the result of many older and more experienced employees having opted to retire or to leave the public service at the same time as many younger employees left. In the follow-up to our 1994 audit of the management of scientific personnel, we noted a similar phenomenon. The change in the age profile represents a significant challenge for the future, notably the need to address succession planning and recruitment. Exhibit 1.11 shows the age profiles of the public service in 1993, 1995 and 1997.

1.59 The employment profile of the public service - that is, the ratio of indeterminate staff to other forms of staff employment - has also changed, but it is not clear whether this will be temporary or lasting. For example, we noted that after an initial reduction, the number of casual and term employees increased. The same trend was noted in the temporary assistance costs for the public sector. A 1995 Treasury Board Secretariat guide on comparing the costs of various approaches to meet the demands for administrative personnel concluded that while temporary assistance, for example, may be cost-effective in the short term, this is not the case over the longer term.

1.60 From 1994-95 to 1996-97, costs for contracting or consulting services increased relative to costs of salary and wages. Contracting and consulting services increased by some 14 percent, while salary and wages decreased by 9 percent. Some $2.2 billion was spent on contracting and consulting services in 1996-97. Since many factors and variables influence the decision to contract for services, it is not possible to draw any macro-level conclusion about the use of contractors as substitutes for public servants. However, we noted the following:

• In 1995, the Treasury Board Secretariat was sufficiently concerned about certain contracting practices to issue specific guidelines to departments outlining unacceptable practices, particularly those involving contracting for the services of former public servants.
• Although departments were asked to monitor the situation and to include it in the scope of their midterm reviews, a number did not.
• Some midterm reviews or departmental audits identified issues that involved contracting with former public servants. The extent of the problem was not documented in the reports.

1.61 The situation needs to be monitored and studied to determine whether casual and term employment, temporary assistance, consulting and contracting are used in specific cases because they are cost-effective or for purposes that may not be cost-effective, such as to demonstrate savings in salary and wages in order to meet the payback requirements, or to bypass restrictions on hirings.

1.62 Incentives have been effective in minimizing involuntary layoffs. There is evidence that as planned and designed, incentives have minimized involuntary layoffs. Although the Public Service Commission reported that as of March 1997 some 970 employees had been laid off, according to Treasury Board Secretariat officials more than half of these employees had, in fact, been transferred through a devolution of activities to other levels of government, such as the transfer of airports to local authorities.

1.63 Few recipients of incentives are coming back as employees. Generally speaking, there is nothing to prevent employees who received incentives from being rehired or reappointed after a period of time normally equal to the one for which they received an incentive. However, rehiring soon after the payment of an incentive may indicate that there was poor planning or that a surplus situation had not really existed. Given the cost of the incentives to the taxpayer, we would expect rehirings to be minimized.

1.64 Overall, we found that from 1992 to March 1997 some 600 individuals (including military and RCMP members) who had received incentives had returned in some capacity. The majority of employees returning were in the Department of National Defence -military personnel hired as public servants, for example. (More details are included in Chapter 2, which discusses our findings in specific departments.) The majority of individuals were hired back as casual or term employees in the public service, but some came back as indeterminate employees. Casual employees are limited to a maximum of 90 days' employment per contract and to 125 days in a 12-month period. We found 11 cases of individuals rehired who had received more than one incentive. In spite of this, we believe that overall the situation has significantly improved since 1992, when we reported that some 800 out of some 13,000 individuals who had received incentives had been rehired in some capacity.

1.65 Many public servants are interested in receiving incentives. Information obtained from Joint Adjustment Committees indicates that at March 1997, for each of the more than 1,400 public servants officially declared "affected," there were three more who were ready to "swap" jobs in order to become eligible to receive a financial incentive and leave or retire from the public service. This ratio was higher in the National Capital Region: five to one. These ratios are conservative since, for example, the numbers reported by the Committees include only individuals for whom management agreed to approve the swapping if the opportunity arose. Furthermore, in the National Capital Region not all departments agreed to participate in the activities of the Joint Adjustment Committees. Our examination of grievances, periodic complaints received and interviews with some union officials lead us to believe that, overall, significantly more individuals were interested in receiving financial incentives and leaving or retiring from the public service than the numbers reported by Joint Adjustment Committees would suggest. In our opinion, this indicates not only that the incentives were attractive but also that not all is well in the public service.

1.66 A number of issues need to be addressed. Now that the fiscal crisis has in many respects subsided, other mechanisms are being used to deal with outstanding or new issues flowing from Program Review. The special committee structure put in place for Program Review no longer exists. The change process has now been integrated into management systems such as the Expenditure Management System, or is taking place through initiatives such as La Relève, aimed at dealing with human resources issues in the public service.

1.67 Although the formal Program Review exercise will end in 1998-99, we believe that a number of issues have yet to be addressed and that significant efforts are still required. For example:

• It has been recognized that many policy issues must be viewed from a more horizontal perspective rather than simply a departmental one.
• There is a continuing need for better quality and consistency of information on, for example, the costs and cost effectiveness of programs and services or on expenditure and work force reductions.
• Important efficiency issues need to be addressed, which could result in hundreds of millions of dollars in savings. Exhibit 1.12 provides illustrations of areas where efficiency gains have been identified by this Office and by the government.

1.68 The need to address a number of human resource issues has been amplified. Our audit work for this chapter and our 1997 chapter, Maintaining a Competent and Efficient Public Service, as well as the Fourth Report of the Clerk of the Privy Council and Head of the Public Service, reveal that work force reductions made to implement expenditure reductions have amplified or made more evident the need to resolve pre-existing and new human resource issues. There is a consensus on the need to:

• adopt longer-term and more strategic plans for human resources, in order to have the right people with the right skills at the right time;
• modernize and simplify human resource systems, notably the classification and job evaluation system and the collective bargaining and staffing systems, as we reported in 1996 and 1997;
• address horizontal issues such as training, hiring and transfer processes in order to improve mobility and career opportunities. Joint Adjustment Committees (paragraph 1.34) might provide an interesting avenue to address some of these issues;
• address rejuvenation and renewal issues, if the public service is to have people with the skills and experience required for the next century while compensating for the loss of experienced professionals and corporate memory;
• address shortages in such groups as policy analysts, economists, auditors, computer system specialists, financial officers, mathematicians, statisticians and engineers - shortages created by the exodus of high-potential employees and the combination of incentives and increased natural attrition that have depleted the ranks to sometimes below critical levels;
• better manage the situation of employees who remain and who feel less secure after work force reductions and after having had their compensation frozen for six years. This can be done, for example, by redesigning work processes, monitoring increases in workloads and stress levels, and addressing low morale and low motivation;
• find ways to return to a more "normal" situation where incentives are used sparingly. In our opinion, an "entitlement" mentality has been created by some 13 years of departure incentives; many public servants have high expectations of being able to benefit from such incentives upon retirement or upon leaving the public service.

Conclusion

Program Review: A Success from Many Perspectives

1.69 From the perspective of central agencies, Program Review has been a success. The government was able to achieve the significant expenditure reductions it estimated were required, and the process ensured significant buy-in from individual ministers and senior officials because they were given the responsibility for deciding on expenditure reductions within the context of fiscal targets.

1.70 According to senior officials, the exercise has led to a considerable rethinking and realignment of government programs to ensure greater relevancy and affordability. In their opinion, Program Review has contributed to making the new Expenditure Management System more focussed on results and impacts than on inputs, and has contributed to a significant restructuring of the public service.

1.71 In spite of a difficult climate, expenditure and work force reductions were implemented without major work disruptions. Furthermore, employee representatives were involved in many aspects, from negotiating incentives to participating actively in Joint Adjustment Committees. Implementation is reported to have made senior officials more aware of the importance of people and of the need to significantly transform and enhance the way people in the public service are managed. This has led to the candid admission by the Head of the Public Service that there is now a "quiet crisis", the result not just of recent work force reductions but of years of neglect; strong actions are required to ensure that the public service remains a vibrant institution.

1.72 On the basis of our review and our examination, and when compared with previous attempts, we conclude that Program Review decisions have, up to now, been implemented successfully in many respects. As noted in this chapter and Chapter 2, however, there were also difficulties and shortcomings. Moreover, the cost of achieving work force reductions was high, not simply in dollar terms but in human terms as well. The task of "Getting Government Right" is not finished.

Substantial Efforts Are Still Required

1.73 The management of work force reductions and departure incentives needs to be improved in a number of situations. Our audit work in relation to occupational groups, for example, leads us to conclude that more effective mechanisms are required to improve the interdepartmental management of work force reductions in certain occupational groups where there may be genuinely surplus employees in one department but where vacant positions or a shortage of the same skills exist in another.

1.74 Another kind of situation that, in our opinion, calls for improved management of work force reductions is that of an organization whose units or parts differ in the status of management of their human resources - one part for which the Treasury Board is the Employer, for example, and another part that has separate employer status. When positions are vacant and skills are easily transferable, or when some functions in DND or the RCMP, for example, can be performed by military or civilians interchangeably, the work force should be managed more globally and strategically. In our opinion, if such an approach had been followed it would likely have resulted in a more cost-effective use of incentives.

1.75 Accountability to Parliament for Program Review and related work force reductions needs to be strengthened. This chapter has highlighted the difficulty of consolidating and reconciling information originating from various sources on work force reductions and the costs associated with departure incentives. We have expressed the view that this limits the government's ability to account completely and comprehensively for the results achieved.

1.76 Although central agency officials and others consider Program Review quite successful so far, full implementation will not be completed before March 1999. In our opinion, the government's significant commitments to expenditure reductions and the significant costs associated with departure incentive programs require that the government and departments account to Parliament for the results achieved, in a way that is complete, clear, transparent and appropriate. The rendering of accounts especially needs to include results in terms of the expenditure reductions as well as the costs, the expenditure reductions associated with the various departure incentive programs, and their effects on the work force.

1.77 There is a need to clarify roles, responsibilities and accountabilities of central agencies and departments in the management of work force reductions. What Program Review clearly demonstrates is that, within the context of broad direction from central agencies, departments are often in the best position to determine what specifically is needed and should be done to implement government decisions in a cost-effective way. For example, in the context of work force reductions, some departments have negotiated with employee representatives the nature and the level of the incentives required. The role of central agencies, in particular the role of the Treasury Board and its Secretariat as the Employer, has also been evolving for some time (paragraph 1.32). In our opinion, there is now ambiguity about the respective accountability of departments and central agencies in relation to the cost-effective management of work force reductions. The framework proposed for work force reductions states that departments will be held accountable for the prudent and cost-effective management of departure incentive programs. However, much needs to be done to clarify the roles, responsibilities and accountability relationships at the central agency and departmental levels.

1.78 There is a need for visible and sustained political leadership and involvement in addressing the "quiet crisis" facing the public service. One lesson to be learned from Program Review and its implementation is the importance of sustained leadership and involvement at the political level, if significant change is to take place. Strong political resolve, a clear objective that provides focus, the involvement and participation of individual ministers working closely with their officials - all were essential ingredients in the success of Program Review.

1.79 It is not evident that there is the same visible leadership, involvement, consensus and resolve at the political level to address the "quiet crisis", and to address public service management issues flowing from expenditure and work force reductions and the rethinking of government programs. Program Review has made it abundantly clear that the ability of governments to successfully tackle a crisis, fiscal or otherwise, depends to a significant extent on the competence and effectiveness of the public service. Various studies and reports, including our 1997 chapter, Maintaining a Competent and Efficient Public Service, have pointed to the fact that the institution is under significant stress. What is also clear is that unless strong actions are taken, there is a risk that the public service of the future may not be as capable of providing Canadians and successive governments with the best possible professional, loyal and non-partisan service.

1.80 Our concern is that the ability of public servants to effect significant change is limited, because they have to operate within existing frameworks and the means and resources at their disposal. For example, the current legislative framework does not allow for the significant changes considered necessary by many stakeholders to reform and simplify the staffing system in the public service. Many previous attempts at reforming human resource management in the public service have failed, in particular, because there was a lack of political leadership, consensus, involvement and resolve.