Chapter 4: Making Transformation Work: Process and Structures

The public is currently unaware of the depth of the province’s fiscal challenge, so Ontarians are unprepared for the severity of the restraint needed to balance the budget by 2017–18. Raising public awareness of this challenge must be done early, clearly and consistently. This process began with the 2011 Budget, which emphasized in a general fashion that significant reforms would be necessary to contain program spending growth to 1.4 per cent per year through 2017–18. Next, the Auditor General noted that “many of the assumptions underlying its estimates for program expenses (that is, expenses excluding interest on the public debt and reserves) were optimistic and aggressive rather than cautious.”  The government's November Speech from the Throne and subsequent Ontario Economic Outlook and Fiscal Review continued the message that difficult decisions would be required on the fiscal front. The Commission’s report sets out in greater detail the fiscal challenge and provides both broad parameters and 362 specific recommendations for what actions will be needed. The 2012 Budget should set out as much detail of the restraint as feasible.

In any organization, a major transformation can succeed only if it is clearly led from the top. The provincial Budget is the organizing document for any future changes in all corners of the broader public sector (BPS) in Ontario, simply because the Budget is where the government’s priorities and plans all come together in one place. It is through the Budget that the government makes its trade-offs among competing claims on the public purse; spells out its spending priorities; sets its targets for each ministry and agency; allocates the funds available to each; and makes provision for the revenues that will cover all spending. Once the Budget is crafted, the task of ensuring that the spending targets turn into firm action falls to the Premier’s Office and Cabinet Office. It must be clear to all that the Premier’s Office is giving full moral and organizational support to the effort, and when prodding is necessary to keep the process moving, only the Premier’s Office has the clout to push the transformation forward. There will be difficult days — even weeks or months — along the way, and it is essential that the public understand both what is being done and how it contributes to the ultimate goal. To this end, the communications effort should be led by the Premier’s Office.

Given the importance of both the budget process and the long-term management of the reform process, we deal with each in some detail.

Budget Planning

The budget process itself needs some reforms. The annual budget — along with the fiscal update that precedes it — can be a powerful educational tool both for Ontarians in general and for the officials who work in the public sector. The general public can learn more about the nature of the fiscal challenges facing their government and the often difficult trade-offs that must be made in deciding both the right mix of taxes and spending, and the right priorities for spending on programs. The public service can learn about the choices that must be made and their role in helping Cabinet make those choices and implement any decisions made. Transparency, clarity, the use of reserves and a long-term perspective are all virtues in budget-making. At the moment, there is too little of all four. Below are recommendations that would strengthen the fiscal planning process.

  1. Chronologically, the sequence of events leading to the next budget is the Speech from the Throne, Ontario Economic Outlook and Fiscal Review and 2012 Budget. (The first two have now been done.) Internally, however, the three events should be considered together and, in a sense, in reverse order. In other words, key elements of the 2012 Budget should be worked out before the Speech from the Throne and Ontario Economic Outlook and Fiscal Review so that public messaging can be clear and consistent over time and across public documents and statements.
  2. The Auditor General’s 2011 Pre-Election Report on Ontario’s Finances demonstrated the confusion around what constitutes a “status quo” outlook, an assumption and a firm plan. To provide clarity in the 2012 Budget, the government should first take a step backward and produce a “clean status quo” fiscal projection out to 2017–18 that reflects only decisions and actions already taken. It should include no assumed future savings from plans not yet elaborated. From this base, the savings from firm new actions should be shown. These actions must be sufficient, under credible assumptions, to secure budget balance no later than 2017–18 and provide a reasonable chance of achieving balance earlier.
  3. Without tax increases, it will be difficult for Ontario to return to a balanced budget earlier than 2017–18. Therefore, this date should remain the target. However, a number of steps should be taken to increase the probability of securing this 2017–18 target:
  • Use private-sector forecasts to inform the budget planning process but reduce those forecasts if it appears the private sector is not appropriately reflecting the risks to the Ontario economy. Any adjustment to the private-sector growth forecasts should be based on sophisticated internal economic and risk analyses. Where there is a range of possible outcomes, do not choose the mid-point of the range, but something on the prudent side of the middle of the risk distribution.
  • Ensure an adequate contingency reserve against forecast errors. To protect against errors in revenue or expenditure growth rates, the level of the reserve should grow over time as the budget projection is pushed further out into the future.
  • Develop a plan to identify and reduce specific risks to the fiscal plan (the contingency reserve is designed more to address risks that cannot be identified before the fact). Examples of specific risks would be certain federal government actions and some pension liabilities.
  • Given the tight constraints that will be imposed on ministry operating budgets, a centrally held operating reserve should continue to be maintained and accessed only through a process involving Cabinet and Treasury Board. It should be used in cases where health and safety might be compromised or services to the most vulnerable are jeopardized. This operating reserve could also be applied to areas where there is a convincing argument that an initial investment is required to achieve substantial savings (and/or quality improvement) over time.
  • Between now and 2017–18, it is inevitable that new programs will be introduced. Consistent with the government’s current policy for program offsets, these will need to be funded through deeper cuts to some existing programs (or their outright elimination). This implies that the initial spending targets for ministries will have to be set low enough to create a policy reserve so that additional cuts do not have to be applied as new programs are considered.
  • At the end of each fiscal year, any reserves not required should be put towards deficit reduction. A transparent accounting process must be established to demonstrate this. How the reserves were handled should be explained in a public document issued — and well publicized — within 60 days of the public accounts figures becoming available each year.
  • In the fiscal approach described in the Commission’s mandate, program spending becomes a residual. The anchor is the target of a balanced budget by 2017–18. As tax rates are not to be changed, revenues will simply reflect the interaction of economic performance and the existing tax structure; in effect, they are a given. Similarly, interest on the public debt is a given, reflecting the interaction of projected interest rates and the amount of provincial borrowing. This leaves total program spending as the residual; that is, what is left after interest payments are subtracted from revenues.
  • Within the total residual for program spending, the government’s focus should first be applied to the big-ticket items — health, education and labour costs. Health and education alone account for more than 60 per cent of total spending (including their labour component). Including labour costs from the rest of spending, these three broad areas account for more than 80 per cent of total program spending. Health and education warrant special attention because they have been among the fastest-growing components of spending and rank at the top of public interest. Health, understandably, is always the top priority that people choose in public opinion surveys. Education is key to the standard of living of individuals and to Ontario society as a whole. Once the government determines the extent to which health and education can be restrained, then the rest of program spending becomes the residual from the residual; that is, what program spending is left over after health and education allocations have been set. Ministry spending will have to be informed by a view of future labour costs. It is not satisfactory to simply assume this away by asserting that ministries must absorb any increases in labour costs. They will be asked to make cuts for many other reasons. Their overall ability to absorb the restraint will not be independent of the course of labour costs.
  • Fiscal restraint exercises too often feature wage freezes and the elimination of managers’ bonuses. But in the context of Ontario’s fiscal challenges, focus must remain on the larger picture, which is the government’s need to get the right people into the right positions at a cost that is both compatible with its fiscal circumstances and appropriately aligned with private-sector compensation. The government will have to attract and retain bright, competent people qualified to carry out the difficult tasks ahead. It will require considerable flexibility in labour arrangements. Such broader considerations may well be more important than any short-term cost savings.
  • Each ministry and agency should be given a spending limit over the period it is projected to take to return to fiscal balance. In this case, the projection period is the seven years to 2017–18. The process of setting those limits began with the 2011 Ontario Economic Outlook and Fiscal Review, which used realistic economic assumptions for its projections. The government has also begun to highlight the seriousness of the challenge and send a clear message to the BPSthat their budgets face an extended period of restraint. This process must continue as decisions are made that will spell out the details that will force ministries to begin fundamental reform.
  • Plans should be reviewed periodically against the fiscal limit and their progress towards long-term goals should be tracked. This process should be led by the Premier’s Office, with support from Treasury Board and the Ministry of Finance. (We set out more details below.) These targets may need to be adjusted for ministries as the process unfolds. But the total cannot be altered from that needed to return to a balanced budget, so any concessions to one ministry must be offset by deeper cuts elsewhere.
  • The Commission has been instructed not to recommend tax increases. However, there are a number of ways that revenues can and should be enhanced without raising tax rates and we will make recommendations in this area.

Transformative Processes and Structures

In Chapter 1, The Need for Strong Fiscal Action, we made the case for immediate bold action by the government to address the fiscal challenge. The remainder of this report deals with the substance of reforms — a broad array of transformational measures that represents the Commission’s best advice on the type of aggressive actions that are necessary. The report does not, however, lay out a specific implementation plan or schedule for these initiatives. The expertise of government officials and external advisers — who know their own ground far more intimately than we do — will be required to translate our recommendations into a more detailed, step-by-step plan for implementation.

The history of fiscal transformations provides important lessons and demonstrates that there are three critical ingredients to successful reforms:

  • The objectives and means of the reforms must be explained clearly and transparently;
  • The substance of the reforms must be sound and make sense to citizens, officials and politicians; and
  • There must be appropriate internal processes to deliver the desired outcomes.

We recommend throughout this document the sorts of communications that will be needed. Here, we complement that advice with some thoughts on the internal processes the government will need to carry out this enormous task.

The Commission understands that the package of reforms recommended in this report amount to a heroic challenge. To the fullest extent possible, we think ministers and their officials should be given a great deal of discretion in deciding how to implement reform in a manner that meets their objectives for their ministries and agencies. At the same time, there are several government-wide issues that many ministers and ministries will face in common; some that ripple through our report are: 

  • Labour issues. Compensation will doubtless be a contentious point, as will questions of severance packages and moving people into other job categories, as priorities shift and efficiencies take hold;
  • Overlap and duplication across programs and services. Economic development programs, for example, are delivered by nine separate ministries and there are several employment services that can be consolidated and rationalized;
  • The possibility that services can be delivered in more efficient ways. Recommendations to this end are found in several areas; and
  • Managing the province’s considerable assets more efficiently. Obviously, a common approach to asset management is desirable.

Ministers and their officials can learn from each other and provide support to their colleagues by coming together on such questions as they arise.

While all elements of the Ontario Public Service and BPSshould have a certain degree of discretion, the critical importance of the transformation we propose means that a vigilant watch must be maintained on the individual reforms and how they are coming together.

It is with all this in mind that we recommend some internal processes to guide this work.

Any transformational process, especially one that involves major expenditure management, must be led from the top. In the case of the Ontario government, this means that the centre of government — the Premier’s Office and Cabinet Office — must be directly involved and provide strong leadership to the process for as long as it takes to return the provincial budget to balance. A steering committee should be established, with representation from the Premier’s Office, Cabinet Office and Ministry of Finance. This committee, supported by a secretariat within Cabinet Office, would be the focal point for the government-wide work necessary to develop implementation proposals for specific reforms and for cross-cutting measures addressing themes that touch on multiple sectors. Once reform processes are underway, this committee would also monitor both the overall reform exercise and progress on individual initiatives.

The steering committee would direct ministers and their ministries to develop proposals and implementation plans, and provide a schedule for reporting these proposals to Cabinet. The steering committee would also guide a number of working groups created to conduct research and analysis of the major cross-cutting issues: labour and compensation; overlap and duplication; new delivery models; and optimization of assets. These groups would be a resource both to the steering committee and to ministries as they develop specific transformation proposals that have implications for other ministries, as many of them will. The steering committee could also commission independent research to inform the working groups on key areas of analysis.

Ministries will bring forward their transformation proposals and plans to a Premier’s results table on strategic reform for its consideration and input prior to formal Cabinet consideration. The results table would be chaired by the Premier and composed of a mix of senior Cabinet ministers and independent experts with experience in cost-cutting and transformational change within their organizations (either public or private). It would be the main forum for both championing and contesting reform proposals. The results table would be directly supported by the steering committee, so there would automatically be direct involvement by senior staff from the Premier’s Office and Cabinet Office, and senior officials from the Ministry of Finance.

Proposals that are more routine and not “transformational” in scale can proceed through the normal channel of Treasury Board and on to Cabinet. The steering committee should continue to monitor the progress of these initiatives, in order to have a comprehensive view of the status of overall reform.

To support the Premier’s results table and Treasury Board, a technical spending review mechanism should be established to review all reform or savings proposals from individual ministries and the annual results-based plan submissions. This technical group would comprise the necessary expertise from one or more private consulting firms that are contracted via a competitive procurement process. It would provide a third-party review and critique of proposals and submissions, ensuring accuracy and adherence to the principles of reform.

Finally, we would recommend that this structure and the associated processes stay in place for at least several years given the breadth, depth and likely length of the reforms. Some parts of it, or at least modifications to it, should become permanent features. For example, we heard so much evidence of confusing overlap and duplication in work across ministries (e.g., economic development programs, social services, and training and employment services) that we recommend that cross-cutting working groups or subcommittees of Cabinet become a permanent feature to deal with these issues.