ARCHIVED - Review of Operating Budgets - Number 1

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Executive Summary

Operating Budgets were introduced government-wide on April 1, 1993 for the purposes of improving service and increasing efficiency through improved resource mix, and better identifying and measuring the cost of programs by making RCMs responsible for all costs except major capital. In January 1995, interviews were conducted in 19 federal departments and agencies of varying sizes to explore the delegation framework that has been implemented by departments with respect to resource allocation, transfer price and 5% carry forward. Also discussed during the interviews were: systems and other tools for decision making; impacts of restructuring and Program Review; and plans for improvement.

The introduction of Operating Budgets has had a generally positive impact on resource management in the federal government. Managers are more involved in resource management decisions, there is increased communication and cooperation among business units, and finance and personnel staff are being relied upon more heavily for substantive specialist advice. There is an improved understanding of the costs of doing business and of resource management concepts generally.

Financial and personnel delegations to responsibility centre managers are increasing, but practice varies for a number of reasons. Perhaps the most important observation about these formal delegations is that they are not as important as the extent to which managers work as teams to manage their priorities and their resources. More than increased delegations, the keys to successful teamwork seem to include transparency of information with respect to decisions on priorities and resource utilization, accountability, and trust. It is also important that managers in each department understand the delegation regime and the rationale behind it. For example, in this era of constraint and workforce adjustment, it is understandable that corporate management continues to monitor personnel actions quite closely.

The flexibility to transfer money between O&M and salary budgets has been well received; managers now want more flexibility. The ability to carry forward 5% of the operating budget, including the increase from 2%, has also been well received. There is a variety of approaches to implementing these two concepts. Each department selects an approach that will work for it. What is important is that the approach be transparent and well understood, and supported with strong financial systems and practices. Although much has been done to introduce better systems and tools for decision making, Responsibility Centre Managers yearn for stronger integrated finance, materiel and human resource systems.

In addition to improving systems and practices, suggestions from Responsibility Centre Managers and Financial Mangers included the following:

• Departments should work continuously improve the understanding of their regimes for delegations, transfers and carry forwards. Particular emphasis should be put on ensuring the transparency of the use of reserves created from carry forward amounts.
• Support services, especially from personnel staff, should be continuously improved and in particular, made more timely and simplified.
• Some departments allocate salary based on averages that do not reflect reality. More precise allocation methods are wanted.
• To reduce the feeling that FTEs are still being controlled rather than just reported, arrange for corporate and central agency reports on FTEs to be generated through a central office.

Treasury Board Secretariat should work with departments to improve information systems, as they are doing within the Financial Information Strategy. Treasury Board Secretariat should also work to reduce the administrative burden with respect to transfers and carry forwards by, for example, streamlining the vote structure and simplifying and speeding up the determination of the carry forward amount.

Other suggestions that are already under consideration by the Treasury Board Secretariat include:

• Allow departments to transfer between O&M and capital budgets.
• Be prepared to tailor the rules to the characteristics and circumstances of each department.
• Develop reasonable rules and processes for dealing with revenue issues. The rules should ensure that there are appropriate incentives to maximize revenues and cost recoveries.
• Consider increasing the 5% carry forward amount to 10% or, indeed, eliminating the percentage cap altogether. Essentially this means moving further toward multi-year budgeting.

Implementation of the Operating Budget concept has been beneficial. But restructuring, downsizing and Program Review have caused managers to use the regime as much to deal with the results of these major changes as to work toward improved service and efficiency through better resource mix. As the concept is fine tuned in the coming years, the original purposes should be continually re-emphasized.

I. Introduction*

(*This study was conducted by an external firm)

Operating Budgets were introduced government-wide on April 1, 1993, there having been several pilot projects in the previous two years. The concept was introduced in part to further the goals of PS2000. The benefits were to include:

• Improved service by allowing RCMs some options with respect to their resource mix.
• Increased efficiency through improved resource mix.
• An ability to identify and measure the cost of programs by making RCMs responsible for all program delivery costs except major capital.

The objective of this Review of Operating Budgets was to examine the delegation framework that has been implemented by departments with respect to resource allocation, transfer price and 5% carry forward under the Operating Budget Regime. In essence, to take the "temperature" to determine thge extent to which departments have implemented the Operating Budget Regime.

This report documents the state of implementation of operating budgets and provides anecdotal information on the benefits of the new budgeting regime, its impact on resource management and year-end spending, and suggestions for improvements in the regime.

Chapter II describes the methodology that was employed in the Review. Chapter III describes the findings with respect to the general impact on resource management, delegations of financial and personnel authorities, the ability to transfer funds between O&M and salary budgets, the 5% carry forward, systems and tools for decision making, and managers' suggestions for improvement. Chapter IV offers a general conclusion and the Appendix lists the 19 departments and agencies that participated in the Review.

We are grateful to all of the managers who offered their time and ideas in a consistently candid fashion during an extremely busy time of year.

In the balance of this report, we use the following terminology:

• Department means department and/or agency.
• Group can mean a functional or program branch, or a regional organization, typically headed by an ADM or DG.

II. Methodology

The Review was to be completed by January 31, 1995. For each of the 19 departments and agencies selected by the Evaluation, Audit and Review Directorate, members of the Review Team met first with the Senior Financial Officer (often accompanied by other managers, and in some cases represented by an appropriate delegate), then with a selection of five or six Responsibility Centre Managers from the National Capital Region in a focus group and then, by telephone, with an average of two Responsibility Centre Managers in regional offices. The logistical work of setting up these interviews began on December 23, 1994 and, with great cooperation from the departments and agencies, the work was substantially completed by January 31, 1995.

Each interview and meeting followed the same agenda, namely asking:

1. How your department implemented the Operating Budget concept.

2. The delegation framework in your department:

3. The 5% carry forward:

4. The transfer price:

5. Systems and other tools for decision making.

6. Impacts of restructuring and Program Review.

7. Plans for improvement.

For each of the 19 departments and agencies, a memorandum was prepared that consolidated the results of all interviews and meetings held. The Review Team then met in a two hour workshop with representatives from the Evaluation, Audit and Review Directorate and from the Expenditure Management Sector of the Program Branch to discuss the findings under each of the agenda headings and to establish the general tone for this Report. The 19 memoranda were then reviewed in detail and used as a basis for this Report.

III. Findings

The subsections of this Chapter report on the items that were included in the agenda for interviews and meetings, except that the following two paragraphs cover the subjects of implementation of the Operating Budget concept and the impacts of restructuring and Program Review.

Considerable energy went into the implementation of Operating Budgets, in part because Treasury Board Secretariat had done a good job of communicating the benefits directly and incrementally through a series of pilot projects. Indeed, some reported that they believed Treasury Board Secretariat actually over sold the benefits, thereby creating expectations that could not be met. Implementation efforts took many forms, including the formation of steering committees and task forces, the development of policies and procedures, extensive training programs, pilots within departments, and phased approaches to implementation. Generally, implementation went very well. Some departments continue to improve their regimes and, in virtually any department, the regime can be expected to change from time to time with changes in circumstances and/or management.

The impacts of restructuring and Program Review were difficult to isolate with any precision. However, some departments and agencies did report the following:

Generally however, as reported in Section A, Operating Budgets have been well received despite the adverse impacts of downsizing and Program Review.

A. The introduction of Operating Budgets has had a generally positive impact on resource management

There is a clear consensus among the managers who participated in the Review that the introduction of Operating Budgets has had a generally positive impact on resource management. The general tenor of the interviews and meetings is summarized in the following descriptions of improvements that were offered on several occasions:

• With respect to resource management issues, there has been a significant increase of communication and cooperation among group heads, and among RCMs within each group. RCMs are finding that they have much more of a say in resource management decisions. There is an increased focus on resolving financial challenges internally within each department.
• Managers are working with and relying more heavily upon advice from their finance and personnel staffs.
• There are increasing demands within departments for transparency and accountability for resource management decisions, and these demands are starting to be met. They include for example, the need for RCMs to know about and understand how central reserves created from carry forward amounts are used.
• There is a better and increasing understanding of the costs of doing business, and of resource management concepts generally. Managers are well aware of the cost implications of workforce adjustment, classification changes, the domino effect of acting pay, and the challenges of managing overtime. It was even suggested that Operating Budgets may play a role in moderating the problem of classification creep.
• There is increased risk-taking by managers, including judicious non-compliance with regulations that do not work in a particular circumstance.
• There is an increased emphasis on planning to take advantage of the flexibility provided under the Operating Budget Regime. Managers are finding that they are better able to move funds to deal with the priorities of their RC or group.
• The regime is credited with having achieved more responsible year-end spending even though most managers do not hold the view that year-end spending has been a major problem. It seems generally agreed that the year-end spending blip is a result of an absence of managers managing their budgets conservatively through the first 9 or 10 months and then, when their budget position is clear, to completing planned and approved projects by year-end.

No significant unintended effects of Operating Budgets were reported. The success of the regime is illustrated in an unfortunate way in two cases where, because of amalgamations or other changes, RCMs lost a degree of authority that they had previously gained and were clearly dismayed by that prospect. (These reversals of fortune did not result from the introduction of Operating Budgets.) Having offered this positive report card, mangers also had lots of suggestions for improvement, as reported in Section F.

B. Financial and personnel delegations to RCMs are increasing, but practice varies for a number of reasons

Perhaps the most important observation that can be made about formal financial and personnel delegations is that they are not nearly as important as the extent to which group heads and RCMs work as teams to manage their priorities and their resources. Among other things, effective team work requires transparency of information with respect to decisions on priorities and resource utilization, accountability, and trust. More and more, this sort of teamwork is becoming the norm.

That being said, the formal delegations of authority can impact perceptions and reduce the potential for effective teamwork. Currently there is no uniform approach to formal delegations across government, nor is there any particular need for such consistency. What is important is that managers in each department understand the delegation regime thoroughly and, more importantly, understand the rationale behind the regime.

Examples can be found where authorities are held largely at the centre, where group heads hold most of the authorities and where the authorities are, to a significant extent, delegated to RCMs. Indeed, within some departments the regime differs from group to group. There are various reasons, some quite complex, for delegation regimes being the way they are. The following tendencies help to explain the variation:

• Small departments tend to hold more authority at the centre because their management team is small and can easily react in a timely manner and with transparency.
• In an environment where funding levels are considered to be relatively stable and/or predictable, authority tends to be pushed down as far as possible. In volatile environments, there is a greater tendency to retain control at the centre in order to be able to reallocate resources quickly to respond to changing priorities.
• To some extent, the management styles of Deputy Ministers and group heads are reflected in delegation regimes.
• In some cases, delegation regimes are constrained by the extent to which information systems can support them. They can also be constrained by the extent to which RCMs are capable of dealing with the delegations. There are cases where RCMs must be certified through training before they are allowed to take on certain delegations.
• There continue to be examples of central management of certain types of expenditures, such as travel and conferences.

In this era of constraint and workforce adjustment, corporate management continues to monitor and in some cases control, personnel actions quite closely. RCMs continue to rely heavily on personnel staff for advice and support, even where the personnel group does not have an approval role. The value of Operating Budgets is enhanced to the extent that these services are provided effectively and on a timely basis.

C. The flexibility to transfer money between O&M and Salary budgets has been well received; managers now want more flexibility

The ability to transfer funds between O&M and Salary budgets is generally well understood and is widely used. As with delegation regimes, it is important that managers understand their department's regime and its rationale. Variations in implementation of the concept include:

• The 20% premium/penalty is managed in different ways:

• In some departments, all transfers are considered to be temporary, in which case those that are intended to be permanent must be arranged through the MYOP process. Some departments offer RCMs the option of identifying a transfer as being temporary or permanent at the time it is made.

Managers in four of the larger departments noted that, by as early as late November, they must forecast their requirements for transfers to March 31 so that the department can meet the February 1 deadline for Final Supplementary Estimates. They need good systems and practices to support them in this area. They also need good systems and practices to support the processing of each transfer. In some cases, these processes are paper intensive and are hampered by the control orientation of specific middle or senior managers. Such challenges will always exist, but they are reducing over time.

Transfers are not always made for the primary objectives of improving service and efficiency through better resource mix. Rather, transfers are often made to take best advantage of circumstances and opportunities that present themselves. For example, a common strategy is to transfer salary funds to O&M when a surplus is forecast as at March 31. In this way, the department enjoys the 20% premium and is able to carry forward O&M and, to some extent, protect the salary base (by being able to transfer the O&M back to salary if necessary the following year).

Having enjoyed the benefits of the ability to transfer funds between O&M and salary budgets, managers want more ability to make transfers, including to and from major capital, and grants and contributions.

D. The ability to carry forward 5% of the operating budget, including the increase from 2%, has also been well received; there are different approaches to implementation

As with delegations and transfers, departments have implemented the carry forward ability in a variety of ways, and it is important that managers understand the rationale behind the approach used by their department. There is a strong sentiment that the most appropriate regime is one where the amount of the carry forward is tracked carefully by source at the RCM level and where the carry forward amount is returned automatically to the RCMs that generated it. But others present arguments against this approach, including:

• Surpluses should be returned to RCMs only in cases where they were justified in advance by an approved business case. In situations where an RCM has benefited from events such as a windfall increase in revenues or an underspent salary budget, there may be no rationale at all for increasing the budget of that RCM in the following year. Indeed, some would argue that the reasons for the surplus need to be analyzed and understood, and that understanding could lead to a budget reduction for the RCM.
• The need for contingency reserves at the corporate and group levels, especially in some departments, is well understood and accepted. Use of some or all of the carry forward amount to create these reserves is good management practice.

In practice, various regimes are used to allocate the carry forward amount throughout the department, including:

• Automatically allocate the amounts directly back to the RCMs that generated them.
• Automatically allocate the amounts to groups that generated them and allow those groups to implement their own regime of allocating to the RCs.
• Allocate amounts to RCs only where an appropriate business case has been established and approved, while retaining the balance in reserves at corporate or group level.
• Retain 50% in corporate reserves and allocate the other 50% to groups and/or RCMs.

Whatever the regime, it is very important that:

• The allocations of the carry forward amount and the utilization of the amounts be highly transparent in order to generate trust and to motivate appropriate behavior.
• Managers who receive the carry forward amounts are accountable for their proper utilization.

The main benefit related to the carry forward amount is the ability to better manage cash flow. Some departments report that they are now using a two year horizon for cash management purposes. The carry forward amount is also credited with reducing the year-end spending blip but, as previously mentioned, it is not generally believed that this has been a major problem in recent years. Some departments have also found the carry forward amount useful in dealing with downsizing and Program Review. The carry forward amount can effectively be used to soften the blow in the year in which it is available, thereby buying time to deal with the underlying challenges.

Within departments, a major challenge with respect to the carry forward amount is that it must be forecast well in advance of year-end. Better tools and processes are required to support this forecasting exercise.

A major irritant to departments relates to the administration of the carry forward by TBS. Despite the fact that the carry forward is often described as "automatic", several departments find themselves spending considerable time with TBS negotiating adjustments to the lapse reported in the Public Accounts to determine the final authorized amount available to be carried forward. Moreover, the amount is not typically confirmed until MYOP discussions are completed in the fall, and the final legislative approval for the carry forward is not received until Final Supplementary Estimates are approved in February. Ideally, RCMs should have the carry forward amount available to them on April 1 of each year so that it can be used in a planned and rational way. More risk averse departments wait until the MYOP negotiations, and others even wait until the Final Supplementary Estimates are approved, before fully releasing the carry forward amount. TBS should explore ways of simplifying the calculation of the carry forward amount, and obtaining confirmation of its availability as early as possible in the fiscal year.

E. Much has been done to introduce better systems and tools for decision making; but RCMs yearn for integrated finance, materiel and human resource systems

Managers reported that extensive work had been done on systems required to support the Operating Budget regime. Improvements included:

• The development of salary management systems for tracking and forecasting salary budget utilization, and reporting FTEs.
• Salary budget and expenditure information is now being entered into the financial system in most departments.
• Direct access to the systems is being given to RCMs and/or their support people.

But managers continue to report significant weaknesses in the systems and tools available to them, including:

• Questionable integrity of the data in the system and the resulting information available from it, especially in the context of having to forecast expenditures to March 31 as at November 30.
• Systems are not integrated, which results in extra work to reconcile figures and to bring all the right information together.
• In some cases, systems are still highly centralized.

As a logical consequence, there is considerable support among RCMs for the acquisition, implementation and sharing across departments of quality integrated finance, human resource and materiel systems.

F. RCMs and Financial Managers have several suggestions for improvement

Considering the short time that Operating Budgets have been in place, it is not surprising that managers have many suggestions for improvement. Some suggestions are aimed primarily at departments themselves, including:

• Departments must work continuously to improve the understanding of the regimes for delegations, transfers, and carry forwards. Particular emphasis should be put on ensuring the transparency of the use of reserves created from carry forward amounts.
• Support services, especially from personnel staff, should be continuously improved and, in particular, made more timely and simplified.
• Some departments allocate salary to RCMs based on averages that do not reflect the reality of each RCM. More precise allocation methods are wanted.
• Arrange for FTE information to be reported automatically through a central office, rather than having RCMs manage that information. There is considerable feeling, often with justification, that FTEs are being controlled rather than just reported.

Some suggestions require the attention of both departments and TBS:

• Work on improving information systems, ideally moving rapidly toward effective common systems that integrate finance, human resources and materiel information. Work to eliminate black books, time consuming reconciliations and timing differences between systems.
• Work to streamline the vote structure, thereby simplifying the processing of and accounting for transfers and carry forwards.
• Work to reduce the administrative burden with respect to transfers and carry forwards by, for example, simplifying and speeding up the determination of the carry forward amount.

Several suggestions require attention by TBS, and many of them are already under consideration. They include:

• Consider allowing departments to transfer between O&M and capital budgets. This would improve resource management by encouraging better decisions on whether to lease or buy assets, and when to continue maintaining, versus replacing, major assets such as roads. It would also help to deal with the concern that, over time, a steadily expanding capital infrastructure requires steadily expanding O&M monies to support it. Since those O&M monies are not generally available, operations and maintenance suffer and the capital infrastructure erodes. In general, this would enable better integration of capital and O&M decisions where long-term planning is required.
• Be prepared to tailor the rules to the characteristics and circumstances of each department. Departments with a stable outlook require different rules from departments that face fluctuating demands. Capital intensive operating departments have requirements that are different from policy departments. There are precedents for treating departments differently, some of which arose under IMAA.
• Develop reasonable rules and processes for dealing with revenue issues. The rules should ensure that there are appropriate incentives to maximize revenues and cost recoveries.
• Consider increasing the 5% carry forward amount to 10% or, indeed, eliminating the percentage cap altogether. Essentially this means moving further toward multi-year budgeting.

IV. Conclusions

There is a clear consensus that the introduction of Operating Budgets has had a positive impact on resource management in the federal government. Resources are managed with more care and skill, the costs of doing business are more visible and better understood, and accountability is more apparent. Some of the keys to this success include:

• Improved teamwork and trust among managers.
• A thorough understanding of the regimes for delegations, transfers, and carry forwards.
• A determination to continuously improve the systems that support the Operating Budget regime.

The report lists several opportunities for improvement, many of which are already underway or under consideration. The positive results to date should ensure considerable government-wide support for all improvement initiatives.

V. Management's Response

Operating budgets and the delegation framework - background

The operating budget regime was introduced government-wide on April 1, 1993, following a series of pilot projects during 1992-93. The objectives of the regime are to improve service by providing managers with more options for service delivery; to increase efficiency by allowing managers to adapt to changes in input costs and by increasing accountability for the cost effectiveness of their decisions; and, to provide a truer measure of the costs of program delivery.

The underlying principles guiding the regime's development were:

• the requirement to live within approved budgets;
• recognition that appropriate empowerment of line and operating managers would be key to achieving increased efficiency and improved service;
• increasing managerial flexibility requires a corresponding increase in accountability;
• empowerment must not compromise fundamental values such as prudence in the use of public funds- consistency and fairness in dealing with the public and probity in the conduct of government operations;
• compliance with legislation and policy.

The two key flexibilities provided by the Treasury Board under this regime were:

While these delegations were, in themselves, very significant, the real impact would be in the way that the departments changed their culture - moving away from the traditional command and control model and adopting appropriate accountability frameworks focusing on results.

At the same time, there could not be a "one size fits all" model. A number of factors would determine the evolution of the management framework under the operating budget regime. For example, in a safety regulatory program, the need for consistency and uniformity might reduce scope for empowerment; a department with a relatively stable operating environment might delegate/empower more than one with a highly volatile operating or fiscal environment; a small agency with a close knit management team might rely less on delegation and more on consensus.

This review was requested by TBS (Program Branch) to examine the delegation framework implemented by departments with respect to resource allocation, transfer price and the carry forward under the operating budget regime.

Response to the report's recommendations

The report clearly states that operating budgets have had a generally positive impact on resource management. Better communication and co-operation in dealing with resource management issues, increased demands for transparency and accountability for resource management decisions, more cost consciousness and more emphasis on planning to take advantage of flexibilities afforded by the regime are all cited in the report. It also noted that no significant unintended effects of Operating Budgets were reported.

While there is a better understanding of the costs of doing business and improved resource management, the impacts of restructuring, downsizing, and Program Review have caused managers to use the regime as much to deal with change as to work toward improved service delivery and better efficiency.

The report states that perhaps more important than increased delegation is teamwork, which requires transparency of information with respect to decisions on priorities and resource utilization, accountability and trust. This is occurring but as part of the continuing evolution of the management frameworks.

Generally TBS is pleased with the findings.

Notwithstanding the generally positive tone of the report, there are a number of suggestions from managers for improvement some being departmental specific, while others call for joint TBS and departmental action, and still others for just TBS action. The following is the TBS response to those recommendations identified for TBS or joint TBS departmental attention.

TBS/departmental action

TBS should:
Work on improving information systems, ideally moving rapidly toward effective common systems that integrate finance, human resources and material information; to eliminate black books, time consuming reconciliations and timing differences between systems.

The Treasury Board recently endorsed the Financial Information Strategy which has as its objective improving the quality and timeliness of financial information. Elements of the Strategy include:

• moving the focus of government accounting from central systems maintained by the Receiver General to departmental systems, so that those closest to the economic events to be reflected in the accounts will have the responsibility for doing so;
• the concept of "clustering" to modernize financial management, which involves identifying a limited number of systems around which departments would cluster based on their requirements;
• a move to full accrual accounting by the year 2000.

Work to streamline the vote structure, thereby simplifying the processing of and accounting for transfers and carry forwards.

Streamlining the vote structure, e.g. consolidating votes or raising the thresholds for establishing separate votes, is a matter that has to be worked out with Parliament. The Treasury Board has approved a TBS strategy for approaching Parliament on the issue of Estimates reform, which will among other things, address this recommendation.

To facilitate the administration of the carry forward, the Treasury Board has agreed to ask Parliament to authorize the establishment of a separate vote in the TBS from which permanent transfers to departments could be made once the amount of the carry forward is known, thereby eliminating the need for Supplementary Estimates.

Work to reduce the administrative burden with respect to transfers and carry forwards by for example, simplifying and speeding up the determination of the carry forward amount.

Departments now have the option of seeking their carry forward in the first regular Supplementary Estimates in the fall. It should be noted that departments generally do not have the books closed on the old year until July. Commencing with the 1996-97 fiscal year, subject to Parliament's concurrence, a separate vote will be established for the carry forward from which permanent transfers to departments will be made once the amounts are known. This will provide for a more timely allocation of the carry forward and eliminate the need for Supplementary Estimates.

The carry forward calculation factors in a number costs eligible for TB Vote 5 funding, approved Supplementary Estimates items cash managed by departments, and other adjustments as a result of TB decisions. Generally the carry forward calculation has been adjusted to respond to departmental concerns. For example, in response to departmental concerns about the difficulties in accurately forecasting their final salary position in time to reflect the conversion factor in final Supplementary Estimates (also noted in this report), provision has been made to adjust the carry forward for any costs or savings associated with the actual salary expenditures at year's end.

Departments still have to demonstrate that the amount is correct.

The transfer price is managed by departments. Since any transfer price due to departments should reflect their forecast year end operating and salary expenditures, logic dictates that it be reflected in final Supplementary Estimates. There is provision to adjust for any post Supplementary Estimate transactions in the carry forward calculation

TBS attention

TBS should:
Consider allowing departments to transfer between O&M and capital budgets.

Operating budgets include minor capital. The remaining separately controlled capital represents funding earmarked for investment purposes in the core infrastructure of the department. By their nature major capital expenditures tend to be project related and the payback is often long term.

TBS has difficulties with the argument put forth that ... "over time, a steadily expanding capital infrastructure requires steadily expanding O&M monies to support it. Since those O&M monies are not generally available, operations and maintenance suffer and capital infrastructure erodes." Departments are expected to cost their capital infrastructure projects on a life cycle basis - if they cannot afford to maintain a new infrastructure they should not be expanding. Moreover, all departments with controlled capital should have a comprehensive capital plan that clearly demonstrates both the requirements and the departments' ability to manage that infrastructure on a life-cycle basis.

Departments can seek authority on a case-by-case basis to transfer funding from their controlled capital to their operating budget.

It should be noted that in conjunction with proposed Estimates reforms, the Secretariat is, with Parliament, pursuing the opportunity to reduce the number of input-oriented votes and move towards assigning one vote per department.

Be prepared to tailor the rules to the characteristics and circumstances of each department. Departments with a stable outlook require different rules from departments that face fluctuating demands. Capital intensive operating departments have requirements that are different from policy departments.

The Treasury Board's review of departmental business plans focused on what would have to change to enable a given department to successfully implement its business plan. It is within this context that the rules will be tailored to departmental circumstances.

Develop reasonable rules and processes for dealing with revenue issues. The rules should ensure that there are appropriate incentives to maximize revenues and cost recoveries.

In vote netted situations, departments are appropriated funding equal to the difference between their approved expenditure budget and forecast revenues. Departments are allowed to spend up to 25% of revenue in excess of their forecast without recourse to the Treasury Board. Departments tend to be extremely conservative with revenue forecasts, concerned about funding shortfalls in the event revenues do not materialize as planned. As a result, appropriations are somewhat higher than would be the case if departments alone assumed the increased risk inherent in tighter revenue forecasts.

As a general rule, vote netted departments end up with revenue surpluses (when compared to their forecasts) and increased spending authority. The carry forward calculation reduces the lapse by the amount of the surplus on the grounds that a better forecast would have resulted in lower appropriations and a correspondingly smaller lapse.

While this is a concern for departments with vote netting, on principle, TBS is of the view that there should be no change. The option always exists to seek TB approval of exceptions in special circumstances.

Consider increasing the 5% carry forward to 10% or, indeed, eliminating the percentage cap altogether. Essentially this means moving further toward multi-year budgeting.

One fact not readily appreciated is that the carry forward constitutes a liability on the upcoming year's expenditure framework. Carry forwards have to be managed in the context of that framework.

Through their business plan submissions, some departments sought increases to the carry forward limit and/or expansion of the scope to cover all capital for example. While it was agreed that there would be no generic changes to the carry forward policy (expansion or otherwise), the Treasury Board is prepared, on a case by case basis to consider special carry forward measures where it can be clearly demonstrated that they are necessary for the department to meet its performance targets.

Appendix - Participating Departments

Canadian Heritage

Canadian International Development Agency

Citizenship and Immigration

Department of Justice

Department of National Defence

Fisheries and Oceans Canada

Foreign Affairs and International Trade

Health Canada

Human Resources Development Canada

Indian Affairs & Northern Development

National Parole Board

National Revenue

Natural Resources Canada

Royal Canadian Mounted Police

Statistics Canada

Transport Canada

Treasury Board

Western Economic Diversification

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