The Treasury Board developed this guide for operational managers to explain the basic framework of the Operating Budget regime.
The guide contains a generic model departments and agencies may wish to adapt when implementing Operating Budgets for their programs. The document is organized to place the budget regime in the larger context of change while making managers more sensitive to people issues and increased accountability.
The introductory overview links PS2000 to the Operating Budget regime and explains why it is being introduced. The budget framework section provides generic information to use in planning the implementation of Operating Budgets. The section on management context outlines the philosophical and cultural environment that managers must foster to derive the most benefit from Operating Budgets. The section on the people side of Operating Budgets emphasizes the importance of reflecting on people issues in planning options or making decisions. Appendices with questions and answers, checklists and information on costing, procedures and systems complete the document along with a feedback section.
A fundamental thrust of Public Service 2000 was to review the way the government serves Canadians. This review revealed that most Public Service employees believe they could provide better service if significant changes were made to government systems and procedures. Over time, these have become rigid and designed primarily to control. It was evident that changes were needed to improve service to the public.
Managers who commented to the various task forces believed that, if given more flexibility and fewer restraints in how to combine resource inputs, they could improve service to the public. The result is the concept of an Operating Budget that includes salary, operating and minor capital funds. Managers will exercise an expanded scope of financial and program decision-making authority under the Operating Budget regime. In turn, the accountability aspect of this change is that managers will have to provide services to Canadians more cost-effectively.
Departments and their managers will get the maximum benefits from Operating Budgets if the management cultural change set out in the PS2000 White Paper takes place. Empowering managers and their employees and encouraging them to use their creative energies to get the job done in the most cost-effective way is essential.
Operating Budgets will be fully implemented on April 1, 1993. Currently, several departments and agencies are participating in pilot projects. Although managers will find the concept reasonably straightforward, they must comply with the legal framework. In addition, they must take into account costing and other considerations as they plan, evaluate options and make program delivery decisions. This guide was prepared to help managers during the transition to Operating Budgets.
To stimulate change and renewal in the Public Service, the government is adopting a new approach to resource management based on establishing an Operating Budget for each program defined in the Estimates.
Operating Budgets are defined on a total or gross expenditure basis and include salaries, wages, operating expenditures and minor capital expenditures.
An Operating Budget is designed to provide managers with more flexibility to achieve intended results. It enhances the manager's capacity to select the most efficient mix of resources. Treasury Board (TB) will no longer allocate or control person-years. Managers will decide the appropriate mix of resources to provide services. At day's end, managers will be responsible for ensuring that their clients get good value for their tax dollar or user fees.
Departments must plan and budget for all personnel costs, including any increases that result from operational or organizational decisions their managers make. Furthermore, departments must allocate and reallocate available resources within an Operating Budget so that they are used efficiently and effectively.
The rationale for Operating Budgets is that the manager should have the flexibility to deliver programs in the most cost-effective way possible, thereby achieving better value for money. The manager's budget will bear the full resource impact of decisions he or she makes. Managers will have to live within their budgets and respond to changing conditions by adjusting practices and modes of operations. This means that, when making program decisions, managers will have to consider all costs to the government, not only those normally charged to their budgets.
The Operating Budget regime is based on certain principles that guided its development and approval. These principles may help to resolve specific issues that arise during implementation.
The shift to Operating Budgets doesn't imply exemptions from the merit principle, collective agreements, official languages regulations, employment equity programs, or financial, personnel and administrative policies.
In many respects, the concept of an Operating Budget is common sense. To administer one, managers will have to plan and manage their programs taking into account the full costs of their operations. Some costing formulae, such as inflation adjustments and transfer pricing, may create the impression that changing over to Operating Budgets is complex. It isn't. As with anything new, the transition period will present challenges to program and line managers.
This new approach to managing resources should also stimulate reviews of related systems. For example, managers should challenge controls that negate empowering front-line managers or deter productive management and improving service to the public.
Managers have more scope for innovation under the Operating Budget regime. To make the best decisions, managers will need to know the full costs of all aspects of delivering their programs, including the full cost of other delivery options. Full cost means all costs to the government, not just those of the program manager.
Under an Operating Budget regime, managers may use various analytical tools to explore new opportunities. For example, a "most efficient organization" or "make-or-buy" analysis may help to design the best organizational structure. Likewise, a "cost-benefit analysis" may be useful in evaluating programs or choosing among options. Readers may find Appendix 3 useful as a quick reference to the guidance available on costing. Functional experts within departments can provide advice on when cost-based analyses seem appropriate.
To implement Operating Budgets successfully, managers will have to take into account the real costs of various inputs when making decisions on resource allocation. Managers should be aware of their options and the costs of these options when making decisions. The cost inputs include: salaries, benefits, overtime, bilingual bonuses, training, travel, and materials; repairs to and maintenance of equipment and buildings where appropriate; and minor capital.
As a general rule, departments are responsible for all personnel costs except those for which Treasury Board (TB) has specifically accepted responsibility.
The TB will fund some personnel costs that would normally come out of departmental budgets. These are costs that departments cannot control, and that may add systemic financial biases to decisions affecting people. Among these costs are the following:
Certain employee benefit costs incurred by the government such as pensions, unemployment insurance contributions, disability insurance, health insurance, dental plan, and payroll tax do not appear in managers' budgets. Though this continues under the Operating Budget regime, these costs are now reflected in the "transfer price".
Changes in a manager's salary obligations have an impact on these costs. In keeping with the concept of accountability for the full costs of managerial decisions, a transfer price applies when personnel costs are increased or reduced. Transfer price adjustments are discussed in more detail later in this chapter.
Departmental costs are all those normally charged to departmental votes. On the salary side, these include:
The TB has signed a work force adjustment directive with the unions. Managers should be aware of the costs when an employee separates. Costs relate to potential pay outs, such as pay in lieu of the unfulfilled surplus period, severance pay, salary protection, retraining or other special lump-sum compensation, or to ensuring continued employment within the Public Service.
Employee costs that result directly from a manager's operational decisions, such as overtime, acting pay, and reclassifications, will come out of his or her budget. Other large or extraordinary payments, such as education leave or extended sick leave, may be more difficult to absorb in individual budgets. Furthermore, placing the financial burden of certain costs on the responsibility centres could bias hiring decisions or compromise personnel policy objectives. For example, it could deter a manager from hiring individuals who are at the top of their salary band or who bring with them unfunded entitlements. These could be employees who need extensive training such as language training, others who require equipment to enable them to do their work such as employees with disabilities, and individuals who have a lot of vacation leave to be cashed-out at year end or have salary protection.
To remove potential biases from the system, departments may wish to set up a corporate budget for such payments. This fund could potentially standardize costs for groups and levels, and include an internal transfer price for accommodation and common services. In separating these funds from individual salary budgets, departments should consider the following: the levels of delegation in the department; the size of individual budgets; the ability of the manager to manage certain payments; and the implications for the department's performance in employment equity, training and development and official languages.
It has been government policy that unspent funds lapse at the end of the year. This practice encouraged managers to use up funds in their budget as the fiscal year drew to a close.
Good management and planning may leave some funds unspent at year end. Therefore, after departmental liabilities are covered off, Treasury Board will permit an automatic carry forward to the next fiscal year of up to two percent of a department's Main Estimates Operating Budget, based on lapses reported in Public Accounts.
The TB will build provisions for anticipated wage settlements into departmental budgets. In some cases, settlements may not be signed in that budget year. When this happens, departments will have to lapse the funding in order to have access to TB Vote 5 funding in future years for the retroactive payments. The two percent carry forward provision is in addition to the lapsed funding for retroactive pay.
For departments and agencies not participating in a pilot project, the first year that the carry forward will be available is 1994-95, based on the 1993-94 Main Estimates.
The carry forward is not cumulative.
Generally, funds may be reallocated within the Operating Budget without consequence. There is one exception. When managers transfer funds from Other Operating Expenditures to Salary and Wages, for example, to hire additional staff, they must set aside a transfer price of 20 percent of the actual salary. Conversely, if managers reduce the salary base by reallocating a portion to operating expenditures, they are entitled to a credit of 20 percent. The transfer price will not apply to student employment programs.
The transfer price adjustment ensures that managers recognize and compensate for personnel costs that are not within their budget allocation.
In recent years, Treasury Board adjusted the salary budget for negotiated wage settlements but generally not for the impact of inflation on Other Operating Expenditures. Fiscal management considerations were responsible for this approach which meant, in effect, that a productivity dividend in the amount of inflation was being taken annually on non-salary operating expenditures. Similar considerations of what is affordable will arise in determining the extent to which Operating Budgets can be adjusted to compensate for the impact of inflation.
As an interim measure through 1994-95 in line with current fiscal constraints, the TB will adjust Operating Budgets for inflation on the basis of a reference year (1992-93 Main Estimates) split of salary and other operating expenditures using the salary proportion to calculate the adjustment factor. Departments will be free to allocate the funds received for their entire Operating Budgets as they deem appropriate.
When departments decide to reallocate funds within their Operating Budgets, the TB will not adjust the weighting factor fixed by the 1992-93 salary proportion to reflect these changes. However, when it approves funding for workload adjustments or new policies, it may revise the factor to reflect significant changes in the composition of Operating Budgets.
In 1995-96, the TB will reassess the feasibility of applying a universal or unweighted adjustment.
Managers should use space efficiently while providing a productive work environment for employees. The Operating Budget regime includes appropriate incentives.
The current system of funding for office accommodation is an amalgam of user pay and Public Works-appropriated funding. During the next few years, Treasury Board Secretariat, Public Works (PWC) and departments will look at developing a more rational approach.
Meanwhile, the TB decided, in the context of the 1991-92 Multi-Year Operational Plan (MYOP) review, that departments should pay from their reference levels for additional space for their existing programs. They also have to include accommodation in costing policy initiatives. This will continue to apply under the Operating Budget regime. As an incentive, TB will consider providing savings to departments when, by reducing staff, they give up space that results in a savings to Public Works. This would be done on a case-by-case basis, with the review taking place as part of the annual MYOP process.
In the past, person-years have been a straightforward and easily understood control on resource use and an indicator of the size of the Public Service.
Since person-year controls are being discontinued, there will have to be other ways to measure the size of the Public Service. Parliament and the public will want some common measure related to employment that would reflect resource use. Departments will also want to measure the size of their organizations because the number and types of employees influence many management decisions including those related to work planning, recruiting, accommodation, career development and training.
Under the Operating Budget regime, the government will continue to report on the size of the Public Service using a measure of labour consumption called "full-time equivalents" (FTE). This will take account of such factors as term and casual employment and job-sharing. Appendix 1 explains how to calculate a full-time equivalent.
In addition, the TB will continue to use the "target executive count" (TEC) to control the number of executives in each department and agency.
Statistics Canada will still report employment numbers and add the full-time equivalent concept for the Public Service as a whole. They will obtain this information from Supply and Services Canada as they do now for employment-related figures. Full-time equivalent numbers will also be required for Part III of the Estimates.
Operating Budgets by themselves do not mean Canadians will receive timely and quality services. More is needed. In the past, there was too much emphasis on controls that limited and constrained managers and their staffs. This inhibited creativity, innovation and risk taking. Simply put, the culture and philosophy of Public Service management had to change. Operating Budgets should be a catalyst for adopting the new approach to Public Service management.
The TB has reduced the non-salary Operating Budgets of departments and agencies periodically during the past seven years. At the same time, these organizations have had to absorb inflationary increases and higher demands for services. Not compensating program budgets for inflation has eroded purchasing power by about 20 percent over this period.
The measures to reduce government spending have affected every Public Service employee in one way or another. Most, if not all, Public Service managers have responded to the challenges this sustained period of deficit reduction has presented. In fact, there is positive evidence that managers have used innovation and creativity successfully to provide adequate services to Canadians. Yet, staff frustration and stress are increasing as a result of sustained restraint measures.
The efforts of managers and their staffs have been invaluable in providing services to Canadians during this period of restraint, which will likely continue for the foreseeable future to reduce the deficit.
Managing expenditures has meant a mix of program reductions and across-the-board cuts. It has meant that departmental budgets have declined significantly in real terms. It certainly has meant doing more with less and, in some cases, doing less with less.
Government programs and services exist to serve Canadians. These same Canadians have an increasingly higher awareness of and higher expectations for the services they receive from their government and its employees. To respond acceptably to these expectations, Public Service employees must adopt a more client-oriented relationship with the public. This means changing how they perceive and serve the public.
All aspects of the program delivery systems, starting at the service counter and extending upward to the political level, should be reevaluated with the client in mind. With employees preoccupied with client satisfaction, they will pursue opportunities and innovations that will result in improved service.
Canadians no longer accept policies or rules that have an impact on their lives or livelihood without some form of consultation beforehand. In some cases, the consultation process will delay the implementation of policies. Even if a policy is intended to enhance the public good or protect its interest, the government can't take the public's point of view for granted or presume its endorsement.
Policies that undergo public consultation are usually more readily understood and accepted than those that don't. Increasingly, in this period of technological change, the expertise required to deal with particular problems lies outside the Public Service. Consultation is the best and sometimes the only means of access to this expertise.
Sustained fiscal restraint has affected all programs, many of which are being reexamined, in whole or in part.
Innovation remains the key to improved efficiency. All managers are responsible for fostering and encouraging innovation throughout the Public Service. To make progress, they must deal with the cultural and structural aspects of innovation at the same time.
On the structural side, the government is acting to provide managers with better management tools like Operating Budgets. Furthermore, the White Paper on Public Service 2000 emphasizes the need for removing all but the essential central controls and for creating a results-oriented culture.
Currently, the central agencies are reconsidering controls and constraints, but departments and individual program managers must do the same thing, too. It is worth noting that one conclusion of the PS2000 review was that departments, not the central agencies, imposed many of the controls that had a negative impact on program delivery.
On the cultural side, managers and employees must be encouraged to unleash their creative energies to decide how best to use available resources to get the job done in the most efficient way. Trust and confidence between employees and their managers is the cornerstone of the desired cultural change.
Generally, the culture of the Public Service has been excessively oriented toward command and control. Simply put, this culture has got to change if the Public Service intends to continue providing responsive, effective and efficient service to Canadians. During the PS2000 studies, it was noted that front-line employees felt they could provide better services to Canadians if they worked in less constrained and controlled environments. In effect, these employees are seeking empowerment.
Empowerment exists when employees believe they have the authority they require to respond to their clients' needs and the ability, support and encouragement to exercise that authority effectively. No manager can direct that an employee be empowered. Critical to determining the extent to which an organization can achieve the empowering of its employees are precise mission statements, a common vision, shared values, clear guidelines, effective training, good communications, explicit goals, demonstrated support and appropriate motivation. In addition, successful empowerment presupposes the delegation of appropriate decision-making authority to the lowest reasonable level in a program coupled with appropriate accountability.
The transition from a framework that minimizes risks and limits discretion to one that encourages risk taking and individual decision making will be challenging. No two programs or situations are the same. For example, in a safety regulatory program, the need for consistency and uniformity might justify a reduced scope of empowerment. Therefore, the balance between empowerment and control must take into account the special circumstances of each situation. Empowerment must not compromise such fundamental values as prudence in the use of public funds, consistency and fairness in dealing with the public, and probity in conducting government operations.
Operating Budgets will provide managers with more flexibility to deal with program requirements and to empower employees.
Although implementing Operating Budgets will give managers more discretion and authority and improve program efficiency, the gap between client demands and resource availability will continue to exist. In addition to cost efficiency, managers are responsible for designing and delivering their programs in the most effective manner possible. This means, in program delivery terms, that managers must be able to assure their ministers that they are using resources in activities of maximum benefit to Canadians.
During past periods of government expansion, some programs grew and increased services to levels that are no longer affordable. In addition, there are some programs that the government may not consider as important in the national interest as others. The same is true of regulatory programs. For example, in the health or safety inspection field, it is often argued that all activities are important and, therefore, must not be constrained by funding limitations. It is the manager's responsibility to review his or her program and allocate resources to the most important activities. Once the manager has exhausted all avenues for reallocation and if serious program deficiencies remain, it is the responsibility of management to bring these to the attention of ministers.
An "effectiveness review" will assist in identifying service or regulatory activities that are relatively less important than comparable activities. In some situations, it may be possible to curtail these activities. Where a reduction in service will result, the manager must consider the scope and extent of public notification required. It will be evident that some low value activities cannot be terminated. In such situations, it becomes the manager's responsibility to look at other ways to deliver the program.
Each situation is unique and the strategic considerations must take this into account. Examples of other ways to deliver programs include contracting out, delegation of program functions to the private sector, transfer payments, licensing arrangements, bilateral agreements and devolution.
Managers must evaluate these options on their own merits and discuss them with their departmental legal advisors at an early stage.
Public Service managers frequently make risk management decisions. Specifically, program delivery decisions that require a manager to make choices about the allocation and best use of limited resources include a risk management process.
Managers must live with risk. Their accountability extends to the management of risks that are part of their operations, regardless of whether they have limited resources to control these risks.
Although risk management has been around for some time, there is no one way to deal with risks. The classic form of risk management is often referred to as "intuition" or "gut feeling". Sometimes a manager, on the basis of his or her knowledge and experience, can use this approach to effectively identify and minimize risks. Given that the government's role in risk management increases as the public's expectation of protection against risk increases, a more structured approach is required.
There are many advantages to a structured framework for risk assessment and management. First, a written framework provides a common understanding of the philosophy and critical elements of risk management decisions for both management and staff. Second, establishing decision criteria or indicators ensures that all relevant factors are considered during decision making, thus enhancing consistency of decisions. Third, it is much easier to monitor, evaluate and improve a process of decision making that takes place within a framework.
To qualify as a structured risk assessment and management framework, the process must be methodical, objective, measurable and defensible. Not all risks can be eliminated or controlled. Some risks have to be accepted as inherent in the nature of the program.
Managers must not sidestep identifying risks simply because they believe that every single risk, once identified, must be controlled. Clearly, managers cannot and should not be expected to control every risk. It is a management responsibility to identify risks, rank them and identify the costs of preventing them. Therefore, managers must rank program risks with the most likely and catastrophic at the top and the least likely and least catastrophic at the bottom. Only so many resources are available. Thus, after reaching a certain point in the ranking from the top down, risks are accepted. The process is dynamic and adjusts to changing environments and conditions. Every manager has certain tolerances and at some point more senior levels of the organization are involved. Ultimately, ministers may also have to be involved.
Though individual managers may apply the risk management process, its success often relies on a cooperative team effort.
Under the Operating Budget concept, the organizational structure put in place to deliver a program will heavily influence the salary part of the budget and have a direct impact on program effectiveness. Adhering to good organizational principles should result in a structure that contributes to the efficient and cost-effective delivery of programs. Managers can improve efficiency by:
When a manager contemplates reallocating funds from or to salaries, he or she should take organizational implications into consideration. When the proposed change is significant, the manager may have to review the whole organization to ensure that any changes to its structure would allow it to continue to support program delivery.
Operating Budgets in themselves will not lead to better or worse people management. The decision-making processes to determine the most efficient use of resources, based on setting clear objectives and establishing personal accountability, are the foundation of good people management.
The challenges and opportunities presented by Operating Budgets will, however, affect the way people are managed. Operating Budgets provide a broader range of options for managers to make the best use of their people and other resources by applying the principles and values of good management, while respecting the legal framework of the Public Service. Effective planning, recruitment, training and development, organizational design and communication are essential to good people management and key to the successful implementation of Operating Budgets. Managers must be aware of both the short- and long-term benefits and costs of good people management decisions.
Though not an incentive to increase or reduce the size of the Public Service, increased flexibility to hire indeterminate employees has proved in some pilot projects to be more cost-efficient. Indeterminate employment may give a better return on investment in training employees by retaining technical expertise within the Public Service. Hiring decisions must weigh the costs of salaries and benefits and the investment costs in employees, such as training and development and the learning curve, against the longer-term gains in corporate memory, commitment and productivity and the return on training and development. Managers must take into account that hiring indeterminate employees involves multi-year expenditure commitments and investments.
People management requires a lot of planning to ensure that the resource planning cycle reflects personnel activities. Managers will have to review all personnel decisions for the possible impact on and costs to the organization as a whole. The introduction of Operating Budgets should cause managers to question their approach to managing positions and the classification function. Until now, positions have often been classified without enough concern for the impact on payroll expenditures. The responsible organization will have to bear the effect of redress decisions, which are often retroactive and have significant costs, within the current year's budget.
People management practices will become more transparent as new delegation, authorities and accountabilities provide more flexibility to managers. Affordability will be a major factor in all resourcing decisions. This does not imply, however, that good people management principles and practices need suffer as a result of a bottom-line approach. On the contrary, they will be critical to how well an organization performs.
The role of the human resources specialist will be key in that good, timely advice and actions will have an impact on the manager's ability to meet objectives and on his or her potential for increased flexibility. The costs of administering the human resources program as well as the cost of individual actions will have a direct impact on the organization. Human resources officers will have to be able to provide advice on such issues as organizational design, classification structure, and personnel policies and procedures as well as their potential impact on the Operating Budget. To play a value-added role, they will have to be involved early in the planning cycle. While continuing to ensure that employees are treated fairly and equitably, they will have to know the mandates and objectives of the managers and the community they serve.
Departments and line managers will have the challenge of managing resources more effectively and the opportunity of putting clients, stakeholders and employees at the centre of their efforts to respond to changing needs and expectations.
Most authorities that affect the management of people are the responsibility of departments. Managers should be aware of their responsibilities and accountabilities and the potential financial implications of the decisions they make under personnel authorities. Line managers should contact their personnel advisors -- or, in the case of legislative responsibilities, their departmental legal advisors -- for information on the level of management delegation within their department and their responsibilities under each of these authorities. Delegation of these authorities within departments should be in line with the delegation of responsibilities and should be consistent with the delegation of financial authorities.
This guide emphasizes how Operating Budgets will provide managers and organizations with greater flexibility and opportunity to innovate in determining more efficient and effective ways to deliver programs and services to the public. The real benefits of Operating Budgets will occur only where clear accountability exists for the achievement of results. This requires clear and well-established planning, budgeting and monitoring frameworks. Without clearly established expectations, no means exists to determine whether resources are being used to best effect.
While a major focus of accountability will be on program and service delivery results, it must also take into account the complexity and multiple responsibilities of the Public Service environment. Accordingly, accountability must also include results in specific areas such as training and development, employment equity, people management, leadership and team work and official languages. For example, in people management, accountability will include whether the manager has established frameworks and mechanisms to assist employees to manage their careers and receive appropriate development.
Accountability regimes must also bring into focus how managers promote and support the underlying values of the Public Service: probity, equity and prudence in the use of resources along with increased emphasis on responsiveness, innovation and service to Canadians.
Within this spectrum of accountability, managers will be held responsible for, and will in turn require their subordinates to answer for, their performance within a management system that contains the following elements:
With Operating Budgets, the shifting of more authority to managers gives rise to expectations that a manager's accountability will focus on the results obtained with the resources provided. This will require the integration and review of judgments about performance in specific areas such as career development and resource management with results achieved in supporting government and ministerial objectives and departmental services and programs.
The key to the successful implementation of Operating Budgets is effective preparation, delegation, role definition, communication and training. As implementation evolves, it will ultimately require and result in a change in management culture.
Operating Budgets will not have the same levels of delegation in departments. Each department should base the appropriate levels of resource delegation on its business activities, structure, size, procedures and capabilities. A department must ensure that its delegation scheme is legal and that its instruments of delegation are appropriate. Departments should reassess their management structures to ensure that the financial, administrative and personnel authorities delegated to the managers responsible for service decisions are consistent. With effective communication, training and management information systems, departments can progressively implement the full flexibility and efficiency that the Operating Budget offers.
To progress to and achieve maximum delegation under Operating Budgets will require enhanced management skill and constructive decision making. Deputy heads and managers alike must ensure that key elements are in place as more authorities are delegated. The "Manager's Checklist" (Appendix 5) lists these key elements as questions that deputy heads and line managers may ask in relation to the whole department or a responsibility centre.
Communication is essential to the success of Operating Budgets. Success depends on managers and employees. Departments should include unions, employees and managers early in discussions before implementing Operating Budgets. Managers, employees and unions need information and an opportunity to discuss the benefits and effects of the new regime and to confirm or dismiss perceptions.
While it is important not to oversell Operating Budgets, discussing the positive opportunities for people may help to minimize the concerns and uncertainty of employees, unions and management.
The "Questions and Answers" (Appendix 6) may help to establish a communications strategy. Managers may also wish to develop their own questions and answers on the implementation process in their own departments.
Effective training in all aspects of Operating Budgets must complement the communication of information. The Treasury Board Secretariat (TBS), the Office of the Comptroller General (OCG), the Canadian Centre for Management Development, and Training and Development Canada are currently dealing with training requirements. Departments may want to develop their own training modules to reflect the skills that their personnel, financial, and administrative staff and line managers require.
Operating Budgets will have a significant impact on financial and people management practices and bring about new expectations of the two functions.
While the financial and personnel functions will continue to provide the traditional services, these functions will assume a management dimension by playing a dynamic support role to managerial decision making through providing advice, analysis and information.
Financial officers can add value to their role by providing advice and assistance to responsibility centre managers on strategic and operational planning, financial legislation, authorities, delegation, policies, costing of inputs, information and reporting, improved access to financial information and financial management information systems.
With flexibility in managing their dollar resources, managers will need more timely information on their salary and wage expenditures and will have to forecast all expenditures. As a consequence, managers will have to use personnel information more effectively. Examining the demographics of an organization and forecasting planned and unplanned turnover patterns should help a lot in mid- to longer-term forecasting. Complementing and supporting the information in departmental personnel systems will be data from central agency-based systems.
In selecting the most appropriate mix of inputs to achieve cost-effective delivery of services, managers need to know all the costs of the various options of delivering their products or services. Financial advisors can assist in costing these options. Managers may seek more assistance from the financial community on cost-benefit analysis, make-or-buy policies and costing as well as those areas mentioned previously.
The financial and personnel functions can no longer work in isolation. Just as managers must know the human resources implications of financial decisions, they must also have good advice on the financial implications of personnel decisions.
Establishing an Operating Budget in itself does not automatically create legal issues. Nonetheless, managers must be aware that using the flexibility of this budget concept could lead to legal concerns or liabilities for the government.
For example, the delegation of ministerial powers, duties or functions outside government, ceasing or reducing inspection or service activities, and using contract personnel may all have legal implications. When considering program delivery options or changes, managers should consult their departmental legal advisor.
In deciding to move to an Operating Budget regime, the government recognized the need for a two-step approach. The first step would be to implement pilot projects based on the initial policy direction and administrative arrangements outlined in the White Paper on Public Service 2000. During this phase, the pilots would help to identify and resolve specific issues that might arise during implementation. After gaining experience with and refining the system, the second step would be full implementation across government on April 1, 1993.
Although the pilot projects are at various stages of implementing Operating Budgets, a summary of some early results appears below. The following observations or recommendations, which are not in order of priority, deserve consideration.
Operating Budget Terms:
Establishing an Operating Budget
The budgeting and reporting structure of government will remain purpose-oriented with one Operating Budget for each program. An Operating Budget will be established as part of the Multi-Year Operational Plan (MYOP) review.
The Operating Budget will normally encompass the resources annually appropriated for salaries and wages and other operating and minor capital expenditures. Operating Budgets are expressed on a gross expenditure basis and exclude transfer payments.
Minor capital will be treated in the same manner as other operating resources. The determination of minor capital will be tailored to each department's circumstances having regard to:
In summary, capital expenditures will be considered minor capital and will, therefore, be part of the Operating Budget when such expenditures: are not investments in fundamental program infrastructure; are substitutable with other operating inputs; and are not controlled separately by departmental management.
Departments should also consider whether there may be elements of their operating resources that should be excluded because of their non-discretionary nature, volatility, and exceptional size as, for example, a quasi-statutory program such as non-insured health services for natives, a subsidy to a Crown corporation, or Supply and Services Canada banking fees.
Allotments for Operating Budgets
For each Operating Budget, the Treasury Board will establish a controlled allotment. Departments will be responsible for establishing and managing their own sub-allotments for salaries and wages and the balance of their Operating Budget.
Vote Structures and Operating Budgets
Until agreement is reached with Parliament on vote definitions compatible with the Operating Budget regime, the following administrative arrangements will be used.
Two Percent Carry Forward
Under the Operating Budget regime, departments and agencies will be authorized to carry forward to the following year eligible lapsing funds of up to two percent of their Main Estimates Operating Budgets.
The amount is not cumulative in that the maximum carry over in a given year is two percent. However, it doesn't have to be fully used in the year that immediately follows. Departments will have the authority to include an item in the following year's final Supplementary Estimates equal to the eligible lapsing funds.
The computation of the carry forward amount starts with the actual lapse that appears in the departmental Public Accounts adjusted to:
Managers are not charged for certain costs that derive from employee status, such as pension costs (including the employer's share of the Canada Pension Plan), insurance benefits (including the employer's share of unemployment insurance), workers compensation and various payroll taxes. These costs add up to about 20 percent of the value of salaries.
Under the Operating Budget regime, when a department or agency moves resources between its provision for personnel costs and the balance of its Operating Budget, the 20 percent factor will apply. The only exception is student employment programs.
Departments are responsible and accountable for managing and reporting these transactions. The transfer price will be applied as follows:
The 20 percent transfer price includes no provision for accommodation. In accordance with the Treasury Board decision on the 1991-92 MYOP, departments are responsible for paying from current reference levels the costs of additional space for existing programs. When costing new policy initiatives, departments will have to include accommodation costs. A credit for accommodation will only apply when the following criteria are met:
Departments will not have recourse to the Treasury Board for Supplementary Estimates for Operating Budgets, except for the following:
Compensation for Inflation
Compensation for the impact of inflation is an issue of affordability. The compensation for inflation on Operating Budgets will be determined in the context of the following:
The approach that has been adopted will provide for the estimated impact of wage settlements based on the initial composition of the Operating Budget, adjusted for resource changes that the TB has approved.
The TB will provide compensation up-front without controls. In other words, the salary adjustment reserve will not be recreated and the resources will simply be rolled into the Operating Budget. The consequence will be that managerial decisions to change the mix of inputs will not have an impact on the amount of resources provided for the estimated impact of wage settlements.
Managing the Wage Bill
Under this regime, departments will have to cash-manage their wage bill, including planning for the impact and timing of collective agreements.
If contracts remain unsigned at year end, departments will be expected to either lapse the funds provided for those contracts or fund the retroactive costs when the contracts are signed. When departments lapse the funds, they will have access to Treasury Board Vote 5 for retroactive pay up to the amount lapsed. (Note: this would be excluded from the two percent carry forward so as not to result in a double credit.)
The 0.6 percent provision for salary increments will be built into the overall inflation adjustment factor for the Operating Budget.
Beginning with the 1991-92 fiscal year, the TB severely restricted access to its Vote 5. This will continue with the Operating Budget regime. Departments will have access to Vote 5 in the following situations:
Reporting on the Size of the Public Service
The government, through Statistics Canada, will continue to report on the size of the Public Service. Statistics Canada will use the term "full-time equivalent", which is essentially a measure of consumption based on average levels of employment. Full-time equivalents correspond to person-years and are relatively simple to compute. It is a moving average of people on the payroll each pay period, adjusted for part-time workers.
Statistics Canada's reporting will comprise all active employees of departments and agencies listed under Schedule I, Part I, of the Public Service Staff Relations Act. It will include the use of human resources currently reported as controlled and non-controlled person-years. The full-time equivalent count will, therefore, include indeterminate, seasonal and casual employment. It will include groups, organizations or agencies currently excluded from Treasury Board person-year controls such as ministers' exempt staff, parliamentary agencies like the Auditor General and special operating agencies.
Departments will be responsible for reporting their use of human resources in terms of full-time equivalents in Part III of the Estimates. This document will become the accountability framework for addressing employment levels in the Public Service. Under an Operating Budget regime, departments will both forecast and report on their use of people. The scope will basically be the same as that currently covered in Part III, including controlled and non-controlled person-years.
Guide to the Costing of Outputs in the Government of Canada. Manual, 1989. Provides a model for costing results within the Operational Planning Framework, including definitions of basic cost accounting terms and concepts. Discusses the steps that would typically be followed in costing outputs, and the decisions to be made at each step. Also presents the cost components and calculations required to support each decision (e.g., cost recovery, most efficient organization, make-or-buy, level of service, and benefit or cost decisions). Authored by the Accounting and Costing Policy Branch of the Comptroller General of Canada. Available from the Treasury Board Distribution Centre.
Benefit-Cost Analysis Guide. Manual, 1976. Outlines the analytical framework underlying benefit-cost analysis by setting forth a consistent body of concepts, definitions and assumptions. Increased freedom from detailed central agency control carries with it increased responsibility to use resources effectively. This Guide should be useful in helping to improve the quality of the information available to decision-makers. Authored by the Treasury Board Secretariat. Available from the Canadian Government Publishing Centre (BT 35-2/1976E).
"A Costing Guide for 'Make or Buy' Analysis of Government Services" (draft), April 1992. Provides a detailed, step-by-step explanation of the methodology to compare the cost of delivering a specific service in-house with the cost of contracting it out. Developed by the Administrative Policy Branch, Treasury Board Secretariat.
Guide for Measuring Employer Personnel Costs, May 15, 1992. Provides guidance to departments that are measuring total personnel costs for a particular operation or service. Authored by the Personnel Policy Branch, Treasury Board Secretariat.
"An Approach to the Most Efficient Organization" (draft), August 1988. Presents an approach to help managers objectively review a program or activity to improve its efficiency and cost-effectiveness. Includes examining alternative management and service delivery strategies. Developed by the Administrative Policy Branch, Treasury Board Secretariat.
"Measuring and Monitoring Program Performance and Service to the Public" (draft), March 1991. Discusses developing useful performance indicators. Developed by the Evaluation and Audit Branch, Office of the Comptroller General (OCG).
Line Managers and Assessing Service to the Public, April 1991. Developed by the Evaluation and Audit Branch of the OCG.
"Measuring Client Satisfaction" (draft), October 1991. Developed by the Evaluation and Audit Branch of the OCG.
Your Guide to Measuring Client Satisfaction, April 1992. A guide to measuring client satisfaction for line managers. Developed by the Evaluation and Audit Branch of the OCG.
The last 10 years have seen the introduction of computer-based financial information systems in all departments and agencies. While these systems focused at first upon the specific accounting control needs of the financial organizations of government, their capabilities have been continually enhanced over the years to satisfy the financial management requirements of the wide spectrum of users in each department or agency. Typically the financial information systems now in operation provide, as a minimum, some capability for planning and budgeting, revenue management, project accounting, and expenditure and cost accounting.
With the use of flexible reporting tools, a myriad of reports can be tailored to each user's needs and made available on-line or in hard-copy format. Easier access to information has also been possible by providing links to individual PCs and to the local area networks (LANs). This change has been particularly valuable for line managers who in the past have not generally been able to obtain information as directly. Many organizations have also begun to introduce links between the financial and other administrative systems, such as personnel or materiel, to provide integrated resource information to line managers for program planning and delivery, which will be increasingly important with Operating Budgets.
Information systems, specifications and studies are available for several administrative functions through the Software Exchange Service (SEC). Managers may use this service to obtain free copies of existing information systems or documentation that the government developed. In return, managers should share the systems they develop or use by providing copies to the SEC to provide potential assistance to others with similar needs. Interdepartmental partnerships on common systems posted on the Software Exchange Service are an effective cost-sharing practice which is becoming more and more popular and which managers should consider in the current restraint regime. The Software Exchange Service may be contacted at (819) 956-0784.
For financial management issues and systems related to Operating Budgets, contact the OCG at (613) 952-7196. For personnel information systems information, contact the Personnel Policy Branch, TBS at (613) 952-3198. For specific departmental financial information systems, please contact your departmental systems group.
Will I be overwhelmed, rather than empowered, with additional delegation or administrative responsibilities?
Empowerment is not simply delegation, but providing a vision and an environment that encourages and motivates managers and employees to take responsibility, with appropriate levels of risk and personal accountability.
In determining appropriate levels of delegation, departments should not overburden managers with administrative responsibilities that may be more appropriately retained centrally or delegated to different levels or areas.
Will senior management accept that any risks I take may have consequences?
Delegating increased authorities and accountabilities will not empower managers if they fear failure and are averse to taking risks. Empowerment requires taking reasonable risks and being accountable for those decisions. Senior management should ensure that managers have an environment that supports appropriate levels of risk taking.
Consequence of Error
Having more flexibility, empowerment and accountability is great, but what happens when I make a mistake?
Obviously, if you make a decision that shows an error in judgment, you will be expected to explain. This is no different from the present. In most programs, managers are continually faced with decision making. Unfortunately, mistakes can and will happen. What is important and relevant is whether you acted reasonably in the circumstances, in light of the information available to you at the time.
Policies and Procedures
Will the constraints of personnel processes such as staffing and classification restrict my flexibility to spend my budget in the most effective and efficient way?
Departments are responsible and accountable for personnel processes and for delegating personnel authorities. Personnel policies and practices should aid rather than inhibit good management. Applying the merit principle ensures that you choose competent people for jobs. Good planning ensures that you have properly trained and adequately skilled staff to achieve operational objectives. Applying employment equity practices ensures that you treat all people fairly and give them equitable opportunities to develop. Departments should review and revise policies and procedures that hinder effective and efficient management.
Departments should delegate personnel authorities appropriately in terms of their operational requirements. Corporate services such as finance, personnel and administration will have to work together to streamline processes and provide consultative services to line managers. Central agencies will continue to review personnel policies in order to eliminate roadblocks to good management.
Will the changes I make in the mix and levels of positions compromise the integrity of the classification system?
You should choose the best mix of employees to meet your program objectives and improve service levels. You must still adhere to classification standards. If you focus exclusively on reducing salary costs by under-classifying jobs, deliberately, it will have a serious impact on service delivery and could cause difficulties in recruiting. Classification simplification will result in a system that you will find easier to understand and manage. The Treasury Board will continue to control the number of executives using the target executive count (TEC).
Temporary Help, Casuals, Term Employees and Students
Will the employment of temporary help, casuals, term employees and students increase?
The current person-year (P-Y) control system favours the hiring of students and temporary workers under contract as they do not use P-Ys. Other factors such as the time it takes to hire indeterminate employees and uncertainty about P-Y allocation have added to the bias to hire term employees. The federal government is the largest student employer in the country, so students make a significant contribution to government operations. To remove a potential financial bias, the Treasury Board Secretariat is examining a salary framework for students that helps managers and is fair to students. On the other hand, managers taking part in pilot projects using Operating Budgets have experienced more flexibility to hire indeterminate employees, thereby retaining job-related expertise in the Public Service, instead of casuals, terms, temporary help and contract workers.
Will I be accountable for increased personnel costs as a result of negotiated salary increases? If so, will my department participate in the negotiating process?
The dynamics of the collective bargaining process remain unchanged by Operating Budgets, although the Secretariat will involve departments more in that process. The major change in resourcing will be that Treasury Board Vote 5 (Government Contingencies) will not offset the results of collective bargaining. As in 1992-93, there will be no Salary Adjustment Reserve Allotment (SARA). Provision for inflation will be rolled into departmental Operating Budgets in conjunction with the MYOP. Departments will have to cash-manage, including lapsing of funds at year end, if contract settlements remain outstanding. Treasury Board Vote 5 will provide for retroactive pay in a subsequent year or years up to the amount lapsed.
Will paying for accommodation directly encourage managers to squeeze employees into substandard accommodation to save money?
Managers should balance the incentive to save money by saving space with the awareness that the quality of the work environment has a direct impact on the productivity, well-being and safety of employees and, therefore, on the level of service to Canadians. The "transfer price" does not reflect accommodation costs. If accommodation requirements increase, then departments will be responsible for these additional costs. If, on the other hand, accommodation requirements decrease, departments may receive a credit.
Terms and Conditions of Employment
Is there a disincentive for me to respect terms of collective agreements -- for example, hours of work, overtime, acting pay -- to achieve the bottom line in my Operating Budget?
No. Operating Budgets do not differ from current budget management in this respect. Managers must continue to respect the terms and conditions of employment and collective agreements. Neglecting to do so may result in grievances and more costs to the employer.
Management Information Systems
Will the personnel and financial systems I'll need to use to manage effectively be adequately integrated by April 1993?
Databases of financial and human resource information systems have to be linked and integrated. The degree of integration and access to information from departmental and Supply and Services Canada (SSC) personnel systems will vary from department to department. The Office of the Comptroller General, the Treasury Board Secretariat and SSC are dealing with the timeliness of salary information from central or common systems.
The Public Service Compensation System and Common Departmental Financial Systems will deal with many concerns about implementation. Departments should assess their own pay processes, salary controls and reporting systems and their potential for expanding managers' access to them. Departments may wish to look at the information systems of other departments -- for example, Communications Canada -- for potential applications. The current state of departmental systems will influence decisions on delegation. Departments should consider incorporating salary planning tools for managers to help them assess their options and the impact of their decisions. To assist departments, the OCG has developed and issued profiles of salary forecasting systems in use in a number of departments, and will issue more information on salary budget and forecasting systems shortly.
Public Service Size
Does eliminating person-year (P-Y) controls mean that the government is no longer concerned about the size of the Public Service?
No, the size of the Public Service remains a public policy issue. However, other ways to measure its size have been developed to replace the previous focus on the number of P-Ys. In 1993, Statistics Canada will report on the size of the Public Service using a measure called "full-time equivalents" (FTE).
In addition, departments must continue to manage the size of their organizations carefully. Even though size is no longer subject to central controls, the number and type of employees influence many management decisions including those on work planning, requirements for office space and work instruments, recruitment, career development strategies and training.
Impact on Employees
How will Operating Budgets affect my position as an employee of the Public Service?
There will be no change in the terms and conditions of employment resulting from Operating Budgets.
How will my employees be informed of this initiative? What should I tell them?
Employees will receive information from many sources including their deputy ministers, their unions and the media. As with any new initiative, fragmented or incomplete information may unsettle employees. To avoid information shortfalls and alleviate employee concerns, you should discuss the Operating Budget concept with them in an open and honest way.
This guide is intended to help managers understand Operating Budgets and use them effectively.
We welcome suggestions to improve the policy and invite you to let us know of any best practices so we can share them with your colleagues in other departments and agencies.
Please send us your comments in any form and by any medium you wish -- E-mail, the attached sheets or other correspondence by mail or fax, or a phone call.
Treasury Board Secretariat
Our phone no: (613) 957-0559
Our fax no: (613) 954-1060
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