Quarterly Financial Report (QFR) for the Quarter Ended December 31, 2018

2. Highlights of fiscal-quarter and fiscal-year-to-date results

This section provides financial highlights and explanations for differences between the fiscal-quarter and fiscal-year-to-date results for the quarter ended on December 31, 2018, and the results of the same period last year.

2.1 Statement of authorities

When compared to those of the same quarter of the previous year, the year-to-date department’s budgetary authorities available for use increased by $948.5 million. As reflected in Table 1: Statement of authorities, the authorities increased from $20,228.1 million in 2017–18 to $21,176.6 million in 2018–19. Major reasons for the increase are outlined below.

Year-to-date variances in authorities available for use

(in millions of dollars)

Initiative Operating Capital Grants and contributions Budgetary statutory authorities Total variances
Operation and sustainment (fleet maintenance) of military capabilities and operating requirements 569.0 n/a n/a n/a 569.0
Implementation of SSE 226.5 282.2 n/a n/a 508.7
LGBT Purge class action final settlement agreement 56.9 n/a n/a n/a 56.9
Innovation for Defence Excellence and Security Program (IDEaS) 44.7 n/a 1.0 0.8 46.5
Pay increase for the federal public administration 14.9 n/a n/a 3.0 17.9
North American Treaty Organization (NATO) n/a n/a 24.2 n/a 24.2
Canadian Armed Forces health benefits 17.3 n/a n/a n/a 17.3
Major capital equipment and infrastructure projects n/a 106.9 n/a n/a 106.9
Pay adjustment for the Canadian Armed Forces (124.2) n/a n/a (24.8) (149.0)
Projects at Canadian Armed Forces bases and other Defence properties (42.4) (105.8) n/a n/a (148.2)
Transfer to Global Affairs Canada (GAC) in support of the Middle East Strategy (53.8) n/a n/a n/a (53.8)
Miscellaneous departmental requirements 58.0 (69.6) 0.4 (36.7) (47.9)
Cumulative variance in authorities available for use 766.9 213.7 25.6 (57.7) 948.5

The year-to-date net increase of $948.5 million over the third quarter in 2017–18 can be explained by variances in funding for a number of initiatives, as detailed below.

  • Operation and sustainment (fleet maintenance) of military capabilities and operating requirements (increase of $569.0 million)

In order to provide ongoing support for operating and capital requirements, the department received additional funding to offset sustainment growth and the inflationary impact on the Defence budget.

  • Implementation of SSE (increase of $508.7 million)

This funding represents incremental demands required to execute the overall SSE policy commitments, including but not limited to, in-service support funding, capital investments and the total health strategy.

  • LGBT Purge class action final settlement agreement (increase of $56.9 million)

The agreement will provide compensation to certain individuals who suffered harm as a result of officially sanctioned policies targeting people who identified as lesbian, gay, bisexual or transgendered. These individuals are current or former members of the Canadian Armed Forces or RCMP or current or former employees of the federal public service. There is $150 million of funding set aside for the Government of Canada to fulfil the Crown’s obligation in the agreement with $56.9 million required in 2018–19. National Defence will be responsible for compensating recipients on behalf of all departments.

  • Innovation for Defence Excellence and Security Program (IDEaS) (increase of $46.5 million)

The increase is due to the implementation of the IDEaS program, which will provide new opportunities to support science, technology and innovation for the defence and security of Canada. The program will also facilitate the integration and adoption of new solutions and capabilities for Canada’s defence and security.

  • Pay increase for the federal public administration (increase of $17.9 million)

The increase is due to adjustments made to terms and conditions of service or employment for the federal public administration.

  • North Atlantic Treaty Organization  (NATO) (increase of $24.2 million)

The increase is due to additional costs related to the NATO Contribution Program’s military budget.

  • Canadian Armed Forces health benefits (increase of $17.3 million)

The increase is related to the timing of payments for Blue Cross coverage that supplements military members’ regular access to health care.

  • Major capital equipment and infrastructure projects (increase of $106.9 million)

The increase in funding is due to net adjustments to the spending profile of major capital equipment and infrastructure projects. These adjustments serve to align financial resources with project acquisition timelines. This increase in cash requirements is mainly due to the Fixed Wing Search and Rescue Aircraft Replacement Project, the Medium Support Vehicle System Project, and the Canadian Surface Combatant Project.

  • Pay adjustment for the Canadian Armed Forces (decrease of $149.0 million)

In 2017–18 adjustments were made to the rates of pay and allowances found in the compensation and benefits instructions for the Canadian Armed Forces. The 2017–18 funding included retroactive pay and was therefore significantly higher than 2018–19 funding for pay raises.

  • Projects at Canadian Armed Forces bases and other Defence properties (decrease of $148.2 million)

The decrease is due to the completion of multiple projects related to infrastructure investments. The intent of this initiative is to repair and upgrade Canadian Armed Forces facilities in order for the department to deliver a large number of infrastructure projects and upgrades across Canada.

  • Transfer to Global Affairs Canada (GAC) in support of the Middle East Strategy (decrease of $53.8 million)

The department transferred budgetary authorities to the GAC Counter-Terrorism Capacity Building Program to support several activities as part of the Middle East Strategy.

  • Miscellaneous departmental requirements (decrease of $47.9 million)

This net decrease is the result of miscellaneous funding variances. It is mainly related to the decrease in the employer's share of the employee benefit plans rate. The Treasury Board Secretariat reduced this share from 15.7% in 2017–18 to 15.2% in 2018–19. This is partially offset by an increase in the operating budget carry forward.

2.2 Departmental budgetary expenditures by standard object

When compared to those of the same quarter of the previous year, the department’s year-to-date total net budgetary expenditures have increased by $354.2 million. As presented in Table 2: Departmental budgetary expenditures by standard object, the expenditures increased from $14,118.8 million in 2017–18 to $14,473.0 million in 2018–19.

Overall, total spending at the end of the quarter represents 68.3% of annual planned expenditures for 2018–19, compared with 69.8% at the end of the third quarter of 2017–18.

Year-to-date variances in net budgetary expenditures (presented by standard object)

(in millions of dollars)

Standard object

2018–19

Year-to-date used at quarter-end

2017–18

Year-to-date used at quarter-end

Year-to-date variance
Acquisition of machinery and equipment 2,164.5 1,674.9 489.6
Repair and maintenance 962.6 796.7 165.9
Rentals 346.8 247.9 98.9
Utilities, materials and supplies 676.8 596.0 80.8
Transfer payments 120.5 48.5 72.0
Transportation and communications 605.6 545.1 60.5
Other subsidies and payments 205.6 174.3 31.3
Acquisition of land, buildings and works 335.7 311.1 24.6
Other expenditures 17.4 8.1 9.3
Personnel 7,105.8 7,542.1 (436.3)
Professional and special services 2,177.4 2,429.8 (252.4)
Revenues netted against expenditures (245.7) (255.7) 10.0
Total net budgetary expenditures 14,473.0 14,118.8 354.2

The year-to-date net increase of $354.2 million can be explained by the variances detailed below.

  • Acquisition of machinery and equipment (increase of $489.6 million)

The increase in spending is mainly due to fluctuations in the timing of cash requirements attributed to aircraft and the Arctic and Offshore Patrol Ships project’s advancement from the design phase to the implementation phase, where design costs were captured in professional and special services, and implementation costs are being captured in acquisition of machinery and equipment.

  • Repair and maintenance (increase of $165.9 million)

The increase in spending is mainly due to higher cash requirements for major repairs to, and the overhaul of, equipment, real property and infrastructure.

  • Rentals (increase of $98.9 million)

The increase in spending is mainly due to airlifts contracted to support missions and services contracted for the Interim Auxiliary Oiler Replenishment Project.

  • Utilities, materials and supplies (increase of $80.8 million)

The increase in spending is mainly due to higher prices, a higher volume of activities and the timing of aviation fuel payments.

  • Transfer payments (increase of $72.0 million)

The increase is mainly due to the increased NATO security investments spending and contributions to the NATO Airborne Warning and Control System (AWACS) program.

  • Transportation and communications (increase of $60.5 million)

The increase in spending is mainly due to major joint military exercises, foreign operations, and more movement of vehicles and equipment.

  • Other subsidies and payments (increase of $31.3 million)

The increase in spending is due to a large payment made in the third quarter of 2018–19 related to the LGBT Purge class action lawsuit.

  • Acquisition of land, building, and works (increase of $24.6 million)

The increase in spending is due to a higher volume of infrastructure construction projects.

  • Personnel (decrease of $436.3 million)

The decrease in spending is due to the one-time lump sum retroactive pay increase for military personnel. This increase covered fiscal years 2014–15, 2015–16 and 2016–17 and was processed in the first 3 quarters of 2017–18. No similar adjustments occurred in the first 3 quarters of fiscal year 2018–19.

  • Professional and special services (decrease of $252.4 million)

The decrease in spending is mainly due to the Arctic and Offshore Patrol Ships project’s advancement from the design phase to the implementation phase. Design costs were captured in professional and special services, and implementation costs are being captured in acquisition of machinery and equipment.

3. Risks and uncertainties

To fulfill its mission, the department purchases the goods and services necessary to train military forces, conduct operations at the government's request and acquire related infrastructure and equipment both domestically and internationally.

The department’s financial transactions are exposed to a broad range of external financial and economic risks including inflation, foreign exchange and commodity price fluctuations. Depending on how these risks unfold, they could lead to higher or lower than anticipated spending. For example, an appreciation of the Canadian dollar or a deterioration of commodity prices (oil in particular) could result in lower spending. Conversely, a depreciation of the Canadian dollar or an increase in commodity prices could result in increased spending.

The department is addressing the financial risks associated with the Phoenix pay issues by implementing new controls and strengthening existing ones. A quality assurance program has been implemented for post-payment verification over pay transactions to ensure the accuracy of payments and of pre-payment verification of high-risk pay transactions. Furthermore, the department is strengthening its salary payment verification processes, audit trail requirements and salary forecasting capabilities with the intent of enhancing the department’s Phoenix risk mitigation efforts.

While the department considers key economic and financial risk factors (including defence-specific inflation and foreign exchange) in developing expenditure strategies, these risks are outside of the control of the department.

The department’s capital acquisition program includes a number of large multi-year acquisition projects. Delays in contracting and procurement activities or delays in deliveries by suppliers for individual projects can lead to reduced expenditures or budgetary surpluses.

Additionally, significant unforecasted operational demands can occur at any time, requiring the department to respond anywhere on the globe. Depending on the extent of the operational demand, the cost of unforecasted operations would be mitigated either through internal reallocations or by requesting incremental funding from the government.

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

SSE puts people at its core and commits to a range of new investments for the Canadian Armed Forces. These investments will deliver the necessary resources and capabilities for a strong and agile military to meet Canada’s defence needs against the backdrop of a complex and constantly evolving global security environment. SSE is the most rigorously costed Canadian defence policy ever developed. The implementation of its various initiatives continues to be a priority for the department during 2018–19.

The Canadian Armed Forces continues its international presence in 2018–19 with deployments in Ukraine (Operation UNIFIER), Central and Eastern Europe (Operation REASSURANCE) and the Republic of Iraq (Operation IMPACT). In 2018–19, Operation PRESENCE-Mali was created to support the United Nations Multidimensional Integrated Stabilization Mission in Mali (Operation MINUSMA). This is part of the Government of Canada’s overall efforts to help set conditions for durable peace, development and prosperity in Mali.

Furthermore, the department continues to focus on the process of renewing its major equipment fleets including fighter aircraft and maritime warships.

Subsequent to the end of the quarter on December 31, 2018, the Prime Minister announced changes to the senior ranks of the department as follows, effective January 28, 2019:

• Mr. Bill Matthews, previously Senior Associate Deputy Minister, becomes Deputy Minister of Public Services and Procurement Canada
• Mr. Claude Rochette, previously Assistant Deputy Minister (Finance) and Chief Financial Officer, becomes Associate Deputy Minister of National Defence

Approved by:

 

// Signed by //

Jody Thomas

Deputy Minister

 

// Signed by //

Julie Charron, CPA, CA

Acting Chief Financial Officer

Dated: February 27, 2019

Ottawa, Canada

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