Federal Economic Development Agency for Southern Ontario - Quarterly Financial Report - Quarter ended September 30, 2011

Statement outlining results, risks and significant changes in operations, personnel, and programs

For the quarter ended September 30, 2011

1. Introduction

This quarterly report should be read in conjunction with the Main Estimates, Supplementary Estimates A, and previous quarterly financial reports for the current year. It reflects results in relation to this funding. It has been prepared by management as required by section 65.1 of the Financial Administration Act and in the form and manner prescribed by the Treasury Board Accounting Standard 1.3. It has not been subject to an external audit or review.

Authority, Mandate & Program Activities

FedDev Ontario was created in August 2009, as part of Canada's Economic Action Plan, to help respond to Ontario's economic challenges, to help restore the Province to its cycle of prosperity and to help position southern Ontario as an important economic driver to building a stronger economy and a stronger Canada.

Further details on FedDev Ontario's authorities, mandate and program activities can be found in the Report on Plans and Priorities and Part II of the Main Estimates.

Basis of Presentation

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes the Agency's spending authorities granted by Parliament and those used by the Agency consistent with the Main Estimates and Supplementary Estimates A for the 2011–12 fiscal year. This quarterly report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before moneys can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes.

When Parliament is dissolved for the purposes of a general election, section 30 of the Financial Administration Act authorizes the Governor General, under certain conditions, to issue a special warrant authorizing the Government to withdraw funds from the Consolidated Revenue Fund. A special warrant is deemed to be an appropriation for the fiscal year in which it is issued.

The Agency uses the full accrual method of accounting to prepare and present its annual financial statements that are part of the Agency's performance reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis.

2. Highlights of fiscal quarter and fiscal year to date (YTD) results

2.1 Authorities Analysis

As reflected in the attached Statement of Authorities, FedDev Ontario has seen a decrease in authorities from the previous year of about 42% ($194.6 million reduction).

Program spending authorities have decreased by 44% ($187.4 million). This material decrease is mainly due to the sunsetting of the programs related to the Economic Action Plan, such as the Community Adjustment Fund (CAF) and Recreational Infrastructure Canada (RInC). Also, legacy programs such as the Ontario Potable Water Program (OPWP) and the Canada-Ontario Infrastructure Program (COIP) ended at the end of the last fiscal year. Through an announcement made by the Prime Minister on December 2, 2010, certain Economic Action Plan programs were given an extension until October 31, 2011. Within FedDev Ontario, only the RInC program met the criteria for extension. This has resulted in a partial reprofile of program funding from fiscal year 2010–11 which was approved under Supplementary Estimates A.

Operating authorities have decreased by 19% ($7.1 million). The reduction in operating authorities comes as a result of the completion of most start-up costs, such as the fit-up of FedDev offices, the relocation costs related to new employee hires, and the anticipated reduced dependence on third party suppliers for the provision of services such as financial operations, accommodations, procurement, and various other services.

The following graph illustrates the relationship between operating authorities (including statutory authorities) and grants and contributions authorities for FedDev Ontario over the last two fiscal years.

Total authorities available for use for the year ending March 31, 2012 compared to total authorities available for use for the year ending March 31, 2011 (in millions of dollars)

[Description of Figure 1]

2.2 Expenditure Analysis

On an overall basis, expenditure patterns in the second quarter of 2011–12 are on a slower pace than they were during the same period in 2010–11. This is being driven by the reduction in spending on the program spending side. The slower pace of program spending can be attributed to the sunsetting of Economic Action Plan and legacy programs that were administered in 2010–11, such as CAF, RInC, OPWP, and COIP. These programs incurred expenditures at a more accelerated rate during the first two quarters of the last fiscal year as compared to the current portfolio of programs being administered in 2011–12.

The pace of spending on the operations side has increased slightly since last year, however is still on pace to spending within the available authorities. This increase in operations spending is mainly attributable to increased salary costs as FedDev Ontario is now fully staffed where it was not at this time last year.

Statement of Authorities

Used during the Quarter

In the second quarter of the 2011–12 fiscal year total budgetary expenditures were $27.3 million compared to $54.2 million reported in the same period of 2010–11, representing a year-over-year decrease of $26.9 million (or 50%). Most of this decrease can be attributed to the sunsetting of programs related to the Economic Action Plan, as quarterly program spending declined by $27.2 million (or 57%) compared to last year. Quarterly operational spending for the second quarter of 2011–12 showed a $0.3 million (or 5%) increase over the same period in 2010–11.

Year-to-Date Analysis

On a year-to-date basis, as of the end of the second quarter of fiscal year 2011–12 total budgetary expenditures were $41.6 million compared to $79.1 million reported at the end of the same period of fiscal year 2010–11, representing a year-over-year decrease of $37.5 million (or 47%). As reflected in the comparison between quarters, the sunsetting of programs is the main contributor to this decrease, as year-to-date program spending declined by $38.9 million (or 56%) compared to last year. Year-to-date operating spending as of the end of the second quarter of fiscal year 2011–12 increased $1.4 million (or 14%) over the same period last year, due primarily to higher salary costs.

Statement of Departmental Budgetary Expenditures by Standard Object

Used during the Quarter

The $1.0 million (or 25%) increase in second quarter salary-related expenditures from fiscal year 2010–11 to fiscal year 2011–12 is reflective of the 26% increase in full time staff when compared to the same time last year (the number of FTEs increased from 175 to 220 between the end of the second quarter of 2010–11 and the same period in 2011–12). Much of the increase in staff and related costs can be attributed to the completion of the Agency's launch and the replacement of temporary help and casual positions with full-time indeterminate staff. Furthermore, there are a large number of funding applications being received as a result of the new Southern Ontario Advantage programs, leading to an increase in workload without the associated increase in program expenditures. This can be explained by the fact that many of these applications are in the early stages of assessment.

In comparison to the same period of 2010–2011, the $377,000 (or 58%) decrease in second-quarter transportation and communications costs can be explained by the significant reduction in the number of relocations taking place, and in travel. As illustrated in the analysis of salary expenditures, the completion of multiple staffing actions has greatly reduced the associated relocation expenditures tied to the hiring process.

The $256,000 (or 23%) decrease in second-quarter professional and special services costs from fiscal year 2010–11 to fiscal year 2011–12 can be explained by the reduced reliance on temporary help and third party service providers, as well as the reduction of training-related expenditures when compared to the same period last year.

Year-to-Date Analysis

The $2.4 million (or 35%) increase in year-to-date salary-related expenditures as of the end of the second quarter of 2011–12 versus the end of the same period in 2010–11 can be explained by the increase in full-time staff as explained in the quarterly spending analysis.

The reduction in transportation and communications costs ($431,000 or 47%) over this period last year can be attributed to a reduction in travel and relocation activity as illustrated in the analysis of the quarterly spending trends in this area.

The reduction in professional and special services expenditures ($544,000 or 30%) can be attributed to the reduced reliance on temporary help, third party service providers, and a reduction in training expenses. For more details refer to the section where the quarter-over-quarter analysis for this expense type is examined.

3. Risks and Uncertainties

As an organization that has existed for only two years, FedDev Ontario faces a number of external and internal risks. The dominant risks focus on the need to formalize internal procedures and the wrap-up of programs related to the Economic Action Plan. Another risk involves the ability to deliver new programs such as the Southern Ontario Advantage, which was launched throughout the fall of 2010. Internal risks which have a potential impact relate to the implementation of FedDev Ontario's plans to reduce reliance on third party delivery of internal services and implementation of plans to further refine its business processes and systems.

There is a risk that financial forecasts generated by the Department will be inaccurate, due to insufficient claims and information from partners and recipients. This risk could cause an eventual lapse of funds. The majority of the department's transfer payments occur in the latter part of fiscal year. This can contribute to some uncertainty when forecasting cash requirements to Parliament. It should be noted that federal spending is not a measure of economic activity. Once projects are approved, Contribution Agreements are negotiated and work begins (designs, engineering, procurement) long before claims are submitted for federal reimbursement.

Mitigation of Risks/Uncertainties:

The Department is taking steps to minimize the size of future funding lapses and improve its expenditure forecasting over the long-term. Particular emphasis is being placed on ensuring that:

• Forecasted expenditures submitted by partners better reflect the real cash flow needs of their projects;
• Project progress is monitored appropriately to identify potential funding lapses earlier in the fiscal year; and
• Claims are submitted as quickly as possible by partners for the costs they have incurred and advances are used in situations where client need is documented and deemed appropriate (e.g., not-for-profit clients).

However, funding lapses cannot ever be totally eliminated due to the complex nature of projects. In particular, numerous projects can encounter legitimate delays that are related to environmental assessments, public consultations, shortages in materials and labour, weather, etc.

To minimize internal risks, FedDev Ontario is continually reviewing and refining its internal policies and procedures to ensure compliance with Central Agency requirements. The Agency is committed to providing ongoing training to its staff and continues to transition services, thereby reducing reliance on third parties where optimal.

A number of contributions made under the Community Adjustment Fund, Southern Ontario Development Program and the Southern Ontario Advantage programs are of a repayable nature. As such, there is a risk of bad debts being incurred. To mitigate this risk, increased communication and monitoring are occurring with recipients under these programs.

4. Significant changes in relation to operations, personnel and programs

FedDev Ontario was established in August 2009 as a component of Canada's Economic Action Plan (CEAP). Initially, its main role was to deliver CEAP programs such as the Community Adjustment Fund (CAF) and Recreational Infrastructure Canada (RInC). However, with RInC ending on October 31, 2011 and CAF having already ended on March 31, 2011, FedDev Ontario's focus is now shifting towards the provision of programs such as the Southern Ontario Advantage that will help better position southern Ontario as a key player in the Canadian economy and return southern Ontario to its cycle of prosperity. The Southern Ontario Advantage programs have over 200 active files with applications ongoing.

In terms of executive team personnel changes, on September 6, 2011 Colleen Robinson became the new Director General for Human Resources at FedDev Ontario.

Approved by:

FedDev Ontario
Quarterly Financial Report
For the quarter ended September 30, 2011