Quarterly Financial Report (QFR) for the Quarter Ended December 31, 2019

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, 2019, 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 department's year-to-date budgetary authorities available for use have increased by $1,647.6 million. As reflected in Table 1: Statement of authorities, the total budgetary authorities increased from $21,176.6 million in 2018–19 to $22,824.2 million in 2019–20. 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 Payments in respect of the long-term disability and life insurance plan for members of the Canadian Forces Protecting Canada's National Security Renewing Canada's Middle East Strategy Supporting Veterans as They Transition to Post-Service Life Reinforcing Canada's Support for Ukraine Budgetary statutory authorities Total variances
Operation and sustainment (fleet maintenance) of military capabilities and operating requirements 586.1 n/a n/a n/a n/a n/a n/a n/a n/a 586.1
Service Income Security Insurance Plan (SISIP) 0.3 n/a n/a 435.5 n/a n/a n/a n/a n/a 435.8
Miscellaneous departmental requirements (10.1) 57.6 17.1 n/a n/a n/a n/a n/a 212.1 276.7
Measures announced in Budget 2019 16.3 n/a n/a n/a 0.3 199.4 4.5 34.1 3.3 257.9
Major capital equipment and infrastructure projects 44.2 84.5 n/a n/a n/a n/a n/a n/a 4.7 133.4
Pay adjustment for the Canadian Armed Forces 94.1 n/a n/a n/a n/a n/a n/a n/a 26.0 120.1
Funding for United Nations (UN) peacekeeping operation in Africa 42.1 n/a n/a n/a n/a n/a n/a n/a 1.5 43.6
Budget 2018 fiscal dividend (72.6) n/a n/a n/a n/a n/a n/a n/a n/a (72.6)
LGBT Purge Class Action Final Settlement Agreement (56.9) n/a n/a n/a n/a n/a n/a n/a n/a (56.9)
Projects at Canadian Armed Forces bases and other Defence properties (7.6) (30.8) n/a n/a n/a n/a n/a n/a n/a (38.4)
Implementation of SSE 103.8 (163.9) 15.2 n/a n/a n/a n/a n/a 6.8 (38.1)
Cumulative variance in authorities available for use 739.7 (52.6) 32.3 435.5 0.3 199.4 4.5 34.1 254.4 1,647.6

The year-to-date net increase of $1,647.6 million over the third quarter in 2018–19 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 $586.1 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.

  • Service Income Security Insurance Plan (SISIP) (increase of $435.8 million)

The increase is due to the transfer of financial management responsibilities and related funding for SISIP from the Treasury Board Secretariat to the department. The funding is required for payments with respect to the long-term disability and life insurance plan for members of the Canadian Armed Forces, expected incremental operating costs, and other anticipated costs related to the transfer.

  • Miscellaneous departmental requirements (increase of $276.7 million)

The net increase is the result of miscellaneous funding variances. It is mainly related to the increase in the employer's share of the employee benefit plans rates. The Treasury Board Secretariat increased the rate from 15.2% in 2018–19 to 15.3% for public service employees and from 15.2% to 18% for members of the Canadian Armed Forces in 2019–20.

  • Measures announced in Budget 2019 (increase of $257.9 million)

The increase is due to measures announced in Budget 2019: Protecting Canada's National Security, Renewing Canada’s Middle East Strategy, Supporting Veterans as They Transition to Post-Service Life, and Reinforcing Canada’s Support for Ukraine.

  • Major capital equipment and infrastructure projects (increase of $133.4 million)

The net increase in funding is due to modifications to the multi-year 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 funding to support and upgrade the armoured combat support vehicle fleet, funding for the A/B Jetty Recapitalization Project, and funding for the definition phase of the Hornet Extension Project.

  • Pay adjustment for the Canadian Armed Forces (increase of $120.1 million)

The increase is due to adjustments made to the rates of pay and allowances as found in the Compensation and Benefits Instructions for the Canadian Armed Forces.

  • Funding for United Nations (UN) peacekeeping operation in Africa (increase of $43.6 million)

The increase in funding is to support the UN peacekeeping operation in Mali through Operation PRESENCE - Mali.

  • Budget 2018 fiscal dividend (decrease of $72.6 million)

The decrease is due to an ongoing reduction to reference levels, as announced in Budget 2018, for the modernization and enhancement of the government’s digital services.

  • LGBT Purge Class Action Final Settlement Agreement (decrease of $56.9 million)

The decrease is due to the timing in accessing the funds required to fulfil the Crown’s obligations with regards to the implementation and administration of the LGBT (lesbian, gay, bisexual, or transgender) Purge Final Settlement Agreement, which was approved by the Federal Court of Canada in June 2018.

  • Projects at Canadian Armed Forces bases and other Defence properties (decrease of $38.4 million)

The decrease is due to the completion of multiple projects related to infrastructure investments funded as part of the Federal Infrastructure Investment Plan initiative to maintain and upgrade federal infrastructure assets.

  • Implementation of SSE (decrease of $38.1 million)

The decrease is primarily due to the timing of funding requirements for capital investments pertaining to SSE policy commitments, which include the acquisition of equipment such as vehicles, spare parts, lab equipment, information technology and software.

The decrease in funding is partially offset by various incremental demands to execute overall SSE policy commitments including funding for the Mobilizing Insights in Defence and Security (MINDS) program and the Innovation for Defence Excellence and Security (IDEaS) program. The MINDS program, which is the revamped and expanded version of the Defence Engagement Program, and the IDEaS program provide new opportunities to support science, technology and innovation for the defence and security of Canada and facilitate the integration and adoption of new solutions and capabilities for Canada’s defence and security.

Additional funding will be sought for capital investments pertaining to SSE during the last quarter of the fiscal year.

2.2 Departmental budgetary expenditures by standard object

When compared to those of the same quarter of the previous fiscal year, the department’s year-to-date total net budgetary expenditures have increased by $971.6 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures increased from $14,473 million in 2018–19 to $15,444.6 million in 2019–20.

Overall, total spending at the end of the quarter represents 67.7% of annual planned expenditures for 2019–20, compared with 68.3% at the end of the third quarter of 2018–19.

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

(in millions of dollars)

Standard object

2019–20

Year-to-date used at quarter-end

2018–19

Year-to-date used at quarter-end

Year-to-date variance
Personnel 7,604.0 7,105.8 498.2
Acquisition of machinery and equipment 2,448.6 2,164.5 284.1
Professional and special services 2,273.9 2,177.4 96.5
Repair and maintenance 1,021.6 962.6 59.0
Utilities, materials and supplies 729.8 676.8 53.0
Other subsidies and payments 234.0 205.6 28.4
Rentals 356.6 346.8 9.8
Acquisition of land, buildings and works 282.6 335.7 (53.1)
Transportation and communications 555.0 605.6 (50.6)
Transfer payments 94.4 120.5 (26.1)
Other expenditures 14.4 17.4 (3.0)
Revenues netted against expenditures (170.3) (245.7) 75.4
Total net budgetary expenditures 15,444.6 14,473.0 971.6

The year-to-date net increase of $971.6 million can be explained by the variances detailed below.

  • Personnel (increase of $498.2 million)

The increase in spending is mainly due to a change in reporting for the Service Income Security Insurance Plan (SISIP), retroactive pay increases, SSE initiatives, and rate changes in various types of compensation for military personnel such as the Post Living Allowance, the Foreign Service Premium and the Post Differential Allowance bonus.

  • Acquisition of machinery and equipment (increase of $284.1 million)

The increase in spending is mainly due to the production increase for the Medium Support Vehicle System Project and the progression of the Joint Support Ship project.

  • Professional and special services (increase of $96.5 million)

The increase in spending is mainly due to progressive payments towards production costs, sustainment, and the development for the Joint Strike Fighter program, the implementation of the Innovation for Defence Excellence and Security (IDEaS) program, spending on the All Domain Situational Awareness Science and Technology Program and the maintenance on naval vessels.

  • Repair and maintenance (increase of $59.0 million)

The increase in spending is mainly due to the timing of payments for major repairs and the overhaul related to various aircraft fleets.

  • Utilities, materials and supplies (increase of $53.0 million)

The increase in spending is mainly due to the timing of monthly payments and the progression of the Headquarters Shelter System project.

  • Other subsidies and payments (increase of $28.4 million)

The increase in spending is mainly due to the LGBT Purge class action settlement payments.

  • Acquisition of land, buildings and works (decrease of $53.1 million)

The decrease in spending is mainly due to the differences in the timing of payments for various construction projects and completed constructions related to the Artic and Offshore Patrol Ships (AOPS) Project.

  • Transportation and communications (decrease of $50.6 million)

The decrease in spending is mainly due to the cyclical nature of military exercises.

  • Transfer payments (decrease of $26.1 million)

The decrease in spending is mainly due to timing differences in payments to the North Atlantic Treaty Organization (NATO).

  • Revenues netted against expenditures (decrease of $75.4 million)

The decrease in revenues netted against expenditures is mainly due to differences in the timing of payments received from foreign countries and a decrease in revenues from the aviation fuel program.

3. Risks and uncertainties

To fulfill its mission, the department purchases the goods and services necessary to train military forces, conduct operations at the request of the Government of Canada 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 such as 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 through the implementation of new controls and strengthening of existing ones. Risk-based pre- and post-payment quality assurance (QA) programs have been implemented to ensure the accuracy of pay transactions and compliance with pay policies and regulations. A formal review of the QA programs is underway to improve pay outcomes for employees, expand the scope of the programs, and increase the focus on high-risk transactions. As part of this initiative, the department is exploring various data analytics solutions to better focus the QA efforts on high-risk transactions. As part of the department’s Phoenix risk mitigation efforts, it is strengthening its human resources data and salary verification processes, its audit trail requirements, and its salary forecasting capabilities.

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.

Risks also flow from claims and litigations involving the department’s normal operations. When the department receives a claim or litigation alleging liability in tort or extra contractual responsibility to cover losses, expenditures or damages, it is analyzed and an appropriate position is developed, based on legal advice. Litigation or settlement may be pursued and they are tracked through the department’s reporting.

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

The department continues to focus on the process of renewing its major equipment fleets including fighter aircraft and maritime warships. In addition, the implementation of various SSE initiatives remains a priority for the department during 2019–20.

 

Approved by:

 

// Original signed by //

Jody Thomas

Deputy Minister

 

// Original signed by //

Cheri Crosby, CPA, CMA

Chief Financial Officer

Dated: February 27, 2020

Ottawa, Canada

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