Federal Economic Development Agency for Southern Ontario - Quarterly Financial Report - Quarter ended December 31, 2011

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

For the quarter ended December 31, 2011

1. Introduction

This quarterly report should be read in conjunction with the Main Estimates, Supplementary Estimates A and B, 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 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 and B 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 53% ($317.4 million reduction).

Program spending authorities have decreased by 56% ($308.5 million). This material decrease is mainly due to the sunsetting of the programs related to the Economic Action Plan, such as the Recreational Infrastructure Canada (RInC) and the Community Adjustment Fund (CAF). Also, legacy programs such as the Ontario Potable Water Program (OPWP) and the Canada-Ontario Infrastructure Program (COIP) came to a close 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. A few CAF projects were also extended. This has resulted in a partial reprofile of program funding from fiscal year 2010-11 which was approved under Supplementary Estimates A (for RInC) and B (for the extended CAF projects).

Operating authorities have decreased by 22% ($8.9 million). The reduction in operating authorities is related to the reduction in program spending authorities due to the wrap-up of activities related to the Economic Action Plan, as well as the completion of start-up activities within the Agency.

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.

Graph 1: 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 Graph 1]

2.2 Expenditure Analysis

Overall expenditure levels are 49% lower at this point in the fiscal year relative to 2010-11. However, the pace of spending relative to total authorities this fiscal year is higher. This is illustrated by the following:

1. Program spending is in line with last fiscal year relative to total authorities. At this point in fiscal year 2010-11 program spending was 22% of budget ($120.8 million spent against authorities of $553.1 million) while fiscal year 2011-12 program spending to date represents 21% of budget ($52.0 million spent against authorities of $244.6 million).
2. Operating expenditures are $1.9 million (or 11%) higher, mainly due to higher salary costs as the Agency is now fully staffed as compared to last year at this time. This has been accompanied by a shifting of costs (and budget) away from professional services due to the reduced reliance on third parties to support its operations.

Statement of Authorities

Used during the Quarter

In the third quarter of the 2011-12 fiscal year total budgetary expenditures were $30.3 million compared to $59.7 million reported in the same period of 2010-11. This represents a year-over-year decrease of $29.4 million (or 49%). Most of this decrease can be attributed to the sunsetting of programs related to the Economic Action Plan, as quarterly program spending declined by $29.9 million (or 58%) compared to last year. Quarterly operational spending for the third quarter of 2011-12 showed a $0.6 million (or 7%) increase over the same period in 2010-11, mainly due to higher salary costs.

Year-to-Date Analysis

On a year-to-date basis, as of the end of the third quarter of fiscal year 2011-12, total budgetary expenditures were $72 million compared to $138.9 million reported at the end of the same period of fiscal year 2010-11, representing a year-over-year decrease of $66.9 million (or 48%). 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 $68.8 million (or 57%) compared to last year. Year-to-date operating spending as of the end of the third quarter of fiscal year 2011-12 increased by $1.9 million (or 11%) over the same period last year, due primarily to higher salary costs.

Statement of Departmental Budgetary Expenditures by Standard Object

Used during the Quarter

Salary-related expenditures in the third quarter are $1.0 million (or 20%) higher than last fiscal year. This reflects the increase in full time staff when compared to the same time last fiscal year (the number of staff increased from 162 to 225 during this period). Much of the increase in salary-related costs can be attributed to the stabilization of the Agency's workforce and the replacement of temporary help with full-time indeterminate staff.

Professional services in the third quarter are $419,000 (or 25%) higher than last fiscal year. This is mainly attributable to the mid-year recovery for IT services which took place in the third quarter of this year whereas during fiscal year 2010-11 this charge did not occur until the 4th quarter.

It should be noted that when this charge is taken out of consideration quarterly spending on professional and special services costs during the third quarter are down $763,000 (or 46%) from the same period last year. Note that this reduction in professional and special services costs is related to the salary increase noted above.

Repair and maintenance expenditures during the third quarter declined by $475,000 (or 94%) compared to last fiscal year, while at the same time acquisition of machinery and equipment expenditures during the same period declined by $412,000 (or 95%) compared to last fiscal year. This is due to the Agency having incurred costs last year in the third quarter related to the fit-up and set-up of its offices to support its operations.

Year-to-Date Analysis

The $3.4 million (or 29%) increase in year-to-date salary-related expenditures as of the end of the third 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 ($384,000 or 28%) over this period last year can be attributed to a reduction in relocation activity as a result of the stabilization of the workforce within the Agency as a whole.

The reduction in repair and maintenance costs ($486,000 or 92%) and the reduction in the acquisition of machinery and equipment ($449,000 or 92%) come as a result of the completion of leasehold improvements to various Agency offices and the stabilization of the Agency's workforce.

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 wrap-up programs related to the Economic Action Plan, and the delivery of the Southern Ontario Advantage Initiatives, which were launched in 2010. Internal risks which have a potential impact relate to the implementation of FedDev Ontario's plans to formalize internal processes and reduce reliance on third-party delivery of internal services.

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.

A number of contributions made under the CAF and the Southern Ontario Development Program and its Southern Ontario Advantage Initiatives 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.

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.

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

In 2011-12, FedDev Ontario's focus has been on the reception, processing, and approval of applications for new projects under the Southern Ontario Advantage Initiatives, and the close out of the projects extended under the RInC and CAF programs.

Pursuant to s. 31.1 of the Financial Administration Act and Order-in-Council P.C. 2011-1297 effective November 15, 2011, $337,500 is deemed to have been appropriated to Shared Services Canada's operating vote, which results in a reduction for the same amount in FedDev Ontario's vote 50, Appropriation Act No. 1, 2011-2012. To date $113,321 has been incurred on behalf of Shared Services Canada by FedDev Ontario against Shared Service Canada's operating vote.

Approved by:

B.A. Archibald, PhD, President
Kitchener, Ontario, Canada
February 29, 2012

Linda Cousineau, PhD, Chief Financial Officer
Kitchener, Ontario, Canada
February 29, 2012

FedDev Ontario
Quarterly Financial Report
For the quarter ended December 31, 2011