Ministry of the Attorney General Français

Legal Aid Ontario Review

On behalf of the Ministry of the Attorney General

April 26, 2017

Table of contents

  1. Executive summary
  2. Limitations of review
  3. Overview of Legal Aid Ontario’s financial position
  4. Opportunities for improvement
  5. Feasibility of balanced budget plans
  6. Appendix A: Criteria
  7. Appendix B: Service/ department descriptions
  8. Appendix C: Expanded legal eligibility services

Executive summary

Background

Legal Aid Ontario (LAO) is an independent, but publicly funded and publicly accountable non-profit corporation set up to administer the Province of Ontario’s legal aid program. LAO was created in 1999 as a result of the enactment of the Legal Aid Services Act (LASA) by the Ontario Government in 1998. LASA provides LAO with a mandate to promote access to justice throughout Ontario for low-income individuals through means of:

LAO provides access to justice for low-income individuals in Ontario by administering services that include certificate services, duty counsel services, community and specialty clinics, Toll-free telephone services and courthouse offices. LAO’s mandate is to "promote access to justice throughout Ontario for low-income individuals by means of providing consistently high quality legal aid services in a cost-effective and efficient manner”. It is always a challenge for LAO to meet the demand for services within the available funding.

LAO plays a central role in the effective and efficient administration of justice in Ontario, which involves coordinating with a number of stakeholders. For example, LAO works with the private bar to provide legal services via the certificate program, funds legal clinics and student legal aid, and supports the operation of courts via the duty counsel program. In this environment, small changes to service levels or funding can have a significant impact to the stakeholder groups. Historically, LAO has consulted with impacted stakeholders to ensure these views are appropriately considered in the decision-making process. However, where client service and financial imperatives have not aligned with stakeholder interests, LAO has faced vocal stakeholder opposition and has been challenged to move forward with decisions.

LAO’s operations are demand driven and the volume of services required is inherently difficult to forecast given the variety of factors that impact demand. Over the last few years, this has led to significant fluctuations in financial results that have been difficult to predict. The Government of Ontario understands the uncertainty of demand and challenges in forecasting certificate costs that tend to have a three-year life cycle and permitted LAO to create the Contingency Reserve Fund (CRF). The CRF was intended to provide LAO with a mechanism to save budget surpluses and therefore have greater financial stability to address uncertainties. Due to previous withdrawals on the CRF, it is currently depleted with no funds available to support current and projected deficits.

The impetus for this review arose from the projected budget deficits for fiscal year FY 2016/17 and the desire to understand the financial impact of the corresponding Balanced Budget Plan announced by LAO in December 2016.

Scope and objectives

Deloitte was engaged by the Ministry of the Attorney General (MAG) to conduct an independent review of LAO considering three objectives:

As such, the scope of this analysis included a historical review of financial figures dating back to FY 2009/10 and projections through to FY 2019/20 with a particular focus on the next 18 months.

The scope of this review did not cover areas related to the operational effectiveness of LAO, including topics such as the organization’s overall mandate and scope of services, operating and delivery model, and corresponding performance outcomes.

Approach and criteria

The following key activities were completed to achieve these three objectives:

A series of criteria relative to the scope of the project were developed to guide the review. Refer to Appendix A for these criteria.

Conclusion

It is evident that the financial situation in which LAO finds itself today is the cumulative impact of a number of events including changes to financial and legal eligibility for its services, changes in demand for its services, and changes to the tariff it pays to private bar lawyers. Our review has identified opportunities that will help LAO with budget monitoring and reporting activities by management and also the Board of Directors.

LAO’s Board and management are fully aware of LAO’s challenging financial situation and a lot of good work has been done to-date. Management also recognizes that more work is required to develop a suite of mitigation strategies to bring LAO’s finances back to balance. Whilst the success of individual mitigation strategies is important, it is equally important that LAO implement a rigorous monitoring and reporting process on the results of each strategy. LAO’s ability to react to changing circumstances and course correct early will be a critical success factor in its path to balance.

It is important to note that the unpredictable nature of LAO’s business means that financial results will always be subject to year-over-year swings. The path to balancing the operating budget is feasible but not without risks and implementation challenges. In this context, it is important for all stakeholders to take a multi-year view of LAO’s financial position. Moving forward, LAO will require significant support to enable it to meet its targets. Difficult choices may need to be made with due regard to the fact that it operates in a complex stakeholder system and is delivering an important service to support the lowest income Ontarians.

Summary of findings

This review identified a number of effective financial management processes and controls. However, there is an opportunity to strengthen some of these practices through more formalized accountability and reporting.

LAO’s regular forecasting model to predict the financial impact of the certificate program has been effective to-date but opportunities exist to improve the model

The certificate forecasting model has evolved over many years and has been an accurate tool to predict the timing and financial impact of issued certificates, but only to the extent that forecasts are accurate on the demand for certificates.

Given the changing nature of LAO’s operations, management should now assess whether the model be redesigned to reflect a more diverse set of inputs and required outputs.

There are opportunities to improve the financial impact analysis of major changes to policy

LAO conducts environmental assessments to predict demand; however, forecasting demand for legal services is challenging given that it depends on a number of factors within each area of law. A separate demand model should be developed to serve as an input to the certificate forecasting model.

Our analysis found that LAO’s forecasting of changes to financial eligibility was largely accurate since it was able to extrapolate demand based on its historic information.

The financial impact assessment of changes to legal eligibility was inherently more challenging and we found limited analysis in this regard. This is partially attributed to the limited justice sector data that is available. In addition, the changes to legal eligibility introduced new complexity that was more difficult to predict.

Any significant changes to policy in the future should be launched over a period of time to mitigate implementation variability and associated financial risk

Our analysis indicates that the implementation of changes to financial eligibility and legal eligibility occurred within a short period of time. This was driven by a desire to serve as many clients as possible and also in response to funding parameters set by MAG. The “big bang” approach constrained the level of impact analysis and exacerbated the impact of unforeseen demand.

Going forward, it would be prudent to launch significant policy changes over time to allow for more impact analysis and, as required, corrective action in the event that costs escalate more quickly than projected.

LAO’s Board of Directors is responsible for internal governance and decision-making around budget management

As LAO’s financial position is complex and continuously evolving, there is an opportunity for LAO to improve the clarity and alignment of financial information presented to the Board of Directors

LAO has developed a Balanced Budget Plan to eliminate its operating deficit across a two-year period with a deficit in year one and a corresponding surplus in year two

Our review indicates that LAO’s Balanced Budget Plan is feasible but that the path to balance is not without risks or implementation challenges

LAO would benefit from creating an overarching balanced budget plan document with defined accountabilities and monitoring processes

Limitations of review

Disclaimer

This report is intended solely for the information and internal use of the Ministry of the Attorney General (or “MAG”). This report is not intended to be and should not be circulated, quoted, disclosed, distributed to or used by any other person or entity without the prior written authorization of Deloitte LLP (“Deloitte”). No other person or entity is entitled to rely, in any manner, or for any purpose, on this report without the permission of Deloitte. Deloitte does not assume any responsibility or liability for losses incurred by any party as a result of the circulation, publication, reproduction or use of this report.

This report includes information provided by Legal Aid Ontario (“LAO”) as part of this review. Deloitte makes no representations about, nor has Deloitte verified or audited the accuracy or correctness of any information provided by LAO. LAO’s management team maintains responsibility for verifying the accuracy or correctness of this information.

We disclaim any undertaking or obligation to advise any person of any change in any fact or matter affecting this analysis, which may come or be brought to our attention after the date hereof. Without limiting the foregoing, in the event that there is any material change in any fact or matter affecting the analyses after the date hereof, we reserve the right to change, modify or withdraw the analysis.

We believe that our analyses must be considered as a whole and that selecting portions of the analyses or the factors considered by it, without considering all factors and analyses together, could create a misleading view of this high level assessment. Amendment of any of the assumptions identified throughout this report could have a material impact on our analysis contained herein. Should any of the major assumptions not be accurate or should any of the information provided to us not be factual or correct, our analyses, as expressed in this report, could be significantly different.

Unless stated, all currency figures are in Canadian dollars.

Finally, no opinion, counsel, or interpretation is intended in matters that require legal or other appropriate professional advice. It is assumed that such opinion, counsel, or interpretations have been, or will be, obtained from the appropriate professional sources. To the extent that there are legal issues relating to compliance with applicable laws, regulations, and policies, we assume no responsibility therefore.

Overview of Legal Aid Ontario’s financial position

LAO projects deficits of $26 million in FY 2016/17 (net of appropriations) and $11 million in FY 2017/18 resulting from budgetary pressures related to financial and legal eligibility expansion, increase in refugee services, and other operational pressures.

Current financial results

The chart below summarizes the year-to-date financial revenue and expenses from the FY 2016/17 forecast (i.e., actual Q3 results and the full-year forecasted figures). This chart demonstrates that the Non-Big Case Management (BCM) certificate program constitutes the largest portion of expenditures and that LAO is most reliant on government funding to support their operations. LAO has incurred a $23.3 million deficit as at Q3 (December 31, 2016) and expects this to reach $29.8 million ($26 million net of appropriations, as shown in Table 1 below) by fiscal year end on March 31, 2017 (as at December 2016). The forecast (full year) represents LAO’s projections of fiscal year-end revenues and expenses at Q3 (December 31, 2016). Refer to Appendix B: Service / department descriptions for details on service categories.

Table 1: Year-to-date and forecasted financial results for fiscal year 2016/17

Year-to-date and forecasted financial results for fiscal year 2016/17

Note 1: As confirmed by MAG and LAO Management at the time that this report was written, LAO’s calculation of government funding excludes the following changes from their original forecast of funding to be received: $1 million in additional Government of Ontario Funding; $119,000 in additional Federal Criminal/Immigration & Refugee funding; and $575,000 in Probono and Innocence Canada funding. It also includes a total $7 million recognition of deferred revenue and excludes a payment of $74,913.48 from MAG for revenue that was recognized in FY 2015/16.

Historical financial results

LAO’s fiscal situation came under significant pressure after the FY 2008/09 Global Recession. There was a $50 million decline in Law Foundation of Ontario (LFO) revenues due to the reduction in Bank of Canada rates, which had a significant financial impact on LAO and contributed to the large deficit in FY 2009/10. The chart below portrays LAO’s operational budget deficit and surplus history since FY 2009/10, when LAO implemented a Modernization Strategy that eliminated the deficits and created surpluses that reduced the accumulated deficit. Table 2 below illustrates how there is high variability in LAO’s operating budget positions, which has been managed in the past.

Table 2: Historical operational budget deficits and surpluses

Historical operational budget deficits and surpluses

Drivers of LAO’s current financial position

In December 2016, LAO made a financial announcement indicating that financial pressures are resulting in budget deficits and mitigation strategies were introduced. This financial analysis is intended to provide context on how the financial pressures occurred.

This review identified that there were a number of significant factors that contributed to LAO’s current financial difficulties. The current fiscal challenge is a product of a combination of events, trends and decisions over which LAO had varying degrees of control including:

  1. Implementation of the Expanded Financial and Legal Eligibility Program
  2. Refugee crisis
  3. Other operational pressures

LAO was not able to sustain the financial implications of the continuation of these three fiscal challenges occurring simultaneously.

1. Implementation of the Expanded Financial and Legal Eligibility Program

In December 2013, LAO submitted a business case to MAG to expand financial eligibility over ten years in order to align with Statistics Canada’s 2013 Low Income Measure (LIM). The business case was approved by MAG, as part of the June 2014 Ontario provincial budget, and LAO received confirmation from MAG in August 2014 that they had approval to proceed with the ten annual 6% increases to financial eligibility. The government committed to providing LAO with more than $150 million in additional funding over a four year period to initiate the eligibility expansion, which includes expanded certificate services, clinics, duty counsel and student legal aid services.

Table 3: Financial eligibility expansion funding

Fiscal year Provincial funding (millions)
Total $162.25
2014/15 (November 1, 2014) $6.41
2015/16 (April 1, 2015) $31.54
2016/17 (April 1, 2016) $48.8
2017/18 (April 1, 2017) $67.0

Note 1: The original proposal included a request for an additional payment in April 2014, however as funding was not remitted to LAO until November 2014, the funding was prorated for the fiscal year since MAG recognized that LAO would not be able to spend the originally proposed 2014 funding in only five months.

The July 25, 2014 Ontario Provincial budget announcement stated that “When fully implemented, raising the income eligibility threshold would allow an additional one million low-income Ontarians to be eligible for legal aid services, more than doubling the number of eligible Ontarians.” The new funding would be applied to expanding eligibility to clients who would not qualify under the existing eligibility guidelines. The Province provided LAO with funding of $31.54 million in FY 2015/16 for the Financial Eligibility Program, of which LAO allocated $17.1 million to the certificate program. In February 2015, LAO observed that the expanded financial eligibility did not produce the expected increase in certificates and forecasted that they would not be able to fully utilize the available funding for the following fiscal year (FY 2015/16). As LAO would be required to return any financial eligibility funding that they did not use by March 31, 2016, LAO began to investigate additional options to increase services in areas where they identified a client need. The board approved a series of legal eligibility expansions for vulnerable clients across seven different domains (Criminal, Family, Refugee, Mental health, Domestic violence, First nations, Metis and Inuit; and Bail) that were effective June 8, 2015 (refer to Appendix C for details).

LAO budgeted between $8-12 million for legal eligibility expansion in FY 2015/16. By July 2015, LAO forecasted that it could exceed the total certificate budget by between $2.3 - 7.9 million (1.2% - 3.9%) by the end of FY 2015/16. Certificate numbers stayed relatively stable to November 2015. Between December 2015 and March 31, 2016, however, increasing demand for certificates, including expanded financial and legal eligibility, resulted in LAO being over its certificate target. While demand for certificates related to legal eligibility expansion was increasing, management was reluctant to make policy changes as they estimated that there would be future surpluses that would offset the short term deficit (management continues to estimate that funding for financial eligibility will eventually offset the program deficits in future years).

In May 2016, LAO management proposed to the Board on a strategy to tighten the legal eligibility criteria in order to decrease certificate issuance; this strategy was implemented in June. By September 2016, management identified that the tightening did not sufficiently impact certificate issuance to bring it within budget and therefore began to explore short-term financing options since they still felt that the program would result in a surplus in the long term. In the fall of 2016, MAG and LAO discussed the possibility of re-profiling the future financial eligibility funding to advance the funding to an earlier date but this was not approved. As a result, with no further options available in December 2016, LAO implemented policy changes to suspend legal eligibility in order to control certificate costs.

2. Refugee crisis

As a result of the increase in the number of displaced persons globally, as well as the increased efforts of the Federal Government to accommodate more refugees in Canada, LAO has seen an increase in the number of refugee certificates issued and therefore expects an associated increase in related expenditures over the next three years. Per the Government of Canada, refugee claimants have seen the following year-to-year changes in refugee claimants. Table 4 below illustrates there have been significant positive and negative changes between years, but the most recent years show a trend of high growth rates.

Table 4: Year-over-year changes in the volume of refugee claimants

Calendar year Volume of refugee claimants % change from prior year1
2011 25,356  
2012 20,510 -19%
2013 10,427 -49%
2014 13,485 29%
2015 16,113 19%
2015 (Jan-Sep)1 11,431 N/A
2016 (Jan-Sep)1 16,369 43%

Source: Government of Canada, Welcome Refugees Key Figures (http://www.cic.gc.ca/english/refugees/welcome/milestones.asp)

Note 1:Statistics were not available for the full 2016 year, therefore increase is based on the increase in refugee claimants between January and September 2015 compared to refugee claimants between January and September 2016

In relation to FY 2016/17, combined funding (including $7.7M of one-time arrangements) from the federal and provincial governments is expected to be sufficient to cover the refugee expenditures for the current year. However, costs are forecasted to increase at a higher rate than funding starting next year. An additional pressure of $14.8 million is anticipated in 2017/18.

In the March 2017 federal budget, additional funding for refugees was identified. LAO estimates that its share of the funding will be approximately $1-2 million. In comparison with LAO’s forecasted pressure of $14.8 million, this leaves a forecasted funding gap of approximately $13 million.

Other operational pressures

Tariff increase costs

On January 25, 2010, LAO signed an MOU with the Criminal Lawyers’ Association and MAG which required seven annual tariff rate increases for a total 41% increase. MAG provided funding up to FY 2012/13 to cover the cost of the tariff and other transformation strategies and committed to making “best efforts to manage funding requirements associated with tariff increases for FY 2013/14 through FY 2015/16 and ongoing” (Legal Aid Ontario Transformation Report Back submission, March 25, 2010, as approved by MAG).

In 2013, MAG allocated additional one-time funding of $6.4 million to LAO’s Contingency Reserve Fund (CRF) to cover the cost of future tariff pressures. On November 5, 2013, MAG indicated that the tariff increase costs in FY 2016/17 and FY 2017/18 would not be funded since certificate issuance had decreased and therefore that LAO should have had sufficient funds to cover the cost of the tariff increase. LAO had $6.4 million held in the CRF to offset the cost of the tariff increase.

LAO allocated $5 million from the CRF to offset tariff funding shortfalls in FY 2015/16. LAO will utilize the remaining $1.4 million in the CRF to offset the funding shortfall in FY 2016/17, but has estimated the remaining financial impact as $14 million. Overall, LAO estimates the tariff increase will result in an annual $14 million funding shortfall (cost increases net of efficiency savings) each year as a result of the tariff increases.

Accumulated Deficit

As shown in Table 5 below, in FY 2009/10 LAO had an accumulated deficit of $21.9 million (due to decrease in LFO revenues), which they began paying off in FY 2010/11 and had fully paid off by FY 2013/14.

By the end of FY 2015/16, LAO had accumulated a deficit of $11.4 million and this deficit is expected to increase in FY 2016/17. Therefore, in addition to balancing the operating budget, LAO will need to incur large surpluses in order to pay off this deficit. LASA permits LAO to allocate any surplus or deficit in a fiscal year to either or both of the two subsequent fiscal years, with the approval of the Attorney General. LAO Management is aware that the deficit needs to be resolved over time and has had discussions with the LAO Board about strategies to eliminate the deficit, for example using any additional LFO revenue when the Bank of Canada rates increase

Table 5: Historical balances of the cumulative budget deficit

Historical balances of the cumulative budget deficit

Contingency reserve fund

The Legal Aid Services Act (1998) requires LAO to maintain a CRF based on an amount specified by MAG. The Memorandum of Understanding states that LAO is entitled to transfer an operating surplus of up to $20 million to the CRF with approval from MAG. Per LAO’s Contingency Reserve Fund Policy and Guidelines, the purpose of the CRF is “to give LAO the ability to fund a severe and extraordinary financial emergency for one or two years or until emergency ends, additional funding is received or services/operations are adjusted”. LAO encounters frequent variations in demand for their services which are unrelated to policy or procedure changes under their control. Therefore, the CRF was established to support LAO during these unanticipated expenditure increases.

Recent operational pressures have depleted the fund to $1.4m balance at year-end 2015/16 and a projected $0 balance for year-end 2016/17 and therefore funds will not be available to support LAO in their recent financial difficulties.

LAO management asserts that the organization would have been able to manage the budgetary pressures had the CRF remained intact. MAG and LAO should collaborate on efforts to rebuild the CRF for future fluctuations.

Opportunities for improvement

Objective #1 Assess LAO’s forecasting methodology regarding financial and legal eligibility

Overview: Certificate forecasting and costs

LAO’s forecasting process involves input from Regional and Divisional Executives, the Business Intelligence Unit, and Finance, who meet to discuss financial trends during the weekly Budget Committee meetings (Prior to legal eligibility expansion, these issues were discussed at biweekly Executive Management Committee meetings):

  1. Finance prepares an initial certificate cost forecast by inputting prior year estimates into LAO’s MS Excel-based budgeting tool (issued certificates × acknowledgement rate × lifecycle rate × average case cost) to calculate estimated annual cost. Lifecycle rate represents the estimated portion of the costs for a certificate that are expected to be incurred in a given year. Average case cost is the average total cost to LAO associated with a given certificate over its lifecycle. Note that both lifecycle rate and average case costs are calculated for each of the 31 case types.
  2. The Business Intelligence Unit completes an environmental scan, which includes analysis of key certificate demand drivers, such as charges laid and refugee claims).
  3. Executives provide insight on regional and district-level pressures and the Refugee Executive shares input on Federal policy changes that may impact refugee demand.

Finance uses the data from the Budget Committee meeting inputs these into the Certificate Cost Forecasting Model to calculate the estimated cost of the certificate program to prepare an updated certificate forecast, which feeds into the quarterly forecast update that is submitted to the Audit and Finance Committee. The same process is used to prepare the annual forecast that is used to prepare the annual budget.

In order to forecast certificate demand for the financial eligibility expansion business case, the Business Intelligence Unit developed a new methodology as the regular certificate forecasting model (described above) could not be used to forecast for new services. They leveraged demographic information from an Environics report that outlined the demographics of the “gap population” (i.e. the individuals who were below the Low Income Threshold, but were not eligible for legal aid), which was the targeted population for the financial eligibility expansion. The Business Intelligence Unit used this demographic data to stratify the gap population data across demographic categories based on LAO’s existing client population (e.g., assumes that the new population will also include X% of women 0-17). Upon identifying the estimated population, the Lead Statistician estimated demand based on the existing LAO client demand for each demographic group. Finance then took the demand related to financial eligibility developed by the Business Intelligence Unit as the “input” into the Certificate Cost Forecasting Model.

Based upon review of the overall process, a methodological approach has been followed to develop a certificate forecast that incorporates input from historical and environmental trends, supported by local input from Divisional/Regional offices. Specific observations related to components of the forecasting process are identified in the following table.

Observation Implication

1. Certificate demand was difficult to forecast following the legal eligibility changes.

LAO had early awareness of growing certificate volumes in summer 2015, but these volumes were forecasted to level out with funding over a three year period. However, after being rather steady to November 2015, the demand for certificate services increased substantially in the last quarter of the FY 2015/16.

Certificate costs reached an unsustainable level, which could not be managed by internal savings within other budget areas. In combination with pressures from increased refugee demand and other operating pressures, this resulted in a significant and ongoing operating deficit.

2. All supporting cost estimates for the legal eligibility expansion were not presented in a single, comprehensive report to the Board to support decision making.

Some supporting cost estimates for legal eligibility expansion were provided to the Board during the selection of service expansion initiatives, however, the final calculation of the legal eligibility cost estimates for the approved/selected expansion options and scenario planning was not presented in a single, comprehensive report.

Although there is no evidence of board misunderstanding on this particular issue, the absence of a single report for significant and complex financial decisions could lead in the future to an increased risk that board decisions are made without a clear understanding of the final cost estimates or the associated financial risks.

3. Unspent funds at fiscal year-end are recovered by MAG, putting pressure on LAO to quickly identify opportunities to utilize funds in-year.

Based on a sample review of Audit and Finance Committee budget reports, there was emphasis on whether financial and legal eligibility expansion initiatives would utilize all available funding.

In a short period of time, the decision was made to expand legal eligibility across seven areas of law (as highlighted in Appendix C) all with the same effective implementation date.

Management implemented the expansion of legal eligibility to ensure that the funding was fully utilized, which resulted in a larger overrun when demand exceeded expectations.

Assigning the same effective date for changes to seven areas of law was a “big bang” approach, resulting in significant swings in demand.

Key opportunities

Ensure that risks are better quantified and communicated by Management to the Board:

Objective #2 Review LAO’s internal governance and decision-making procedure as it relates to budget management

Overview: annual financial planning and monitoring

An annual Board retreat is held to identify the strategic priorities for the upcoming fiscal year. These priorities are used to prepare the budget and business plan. Finance estimates the cost of Non-Big Case Management certificates using the certificate forecasting process described above and makes adjustments based on input from the Executive Management Committee (EMC) to keep expenses within expected funding. The EMC, followed by the Audit and Finance Committee, and the Board approve the budget prior to finalization.

On a monthly basis, Finance extracts data on actual expenses and revenues and prepares the Statement of Operations (SOP) budget variance report. The Finance team reviews the results of the budget variance report at the monthly SOP review meeting and identifies variances that require additional follow up with Regions/Divisions. Regional/Divisional Directors are responsible for monitoring budget variances within their Region/Division and are accountable for ensuring that they achieve a balanced budget.

On a quarterly basis, Finance leverages the results of the SOP review meetings to prepare a financial narrative and presentation for the Audit and Finance team, which includes actual revenues/expenses incurred to date, an updated annual forecast, a forecast to budget analysis identifying key assumptions and changes, and discussions/tracking on key components of the financials (e.g. financial/legal eligibility expansion).

Based upon review of the overall methodology and approach taken, the budget governance processes include regular review, monitoring, and reporting of budget-to-actual variances. Budgets are reviewed and approved by the EMC, the Audit and Finance Committee, and the Board prior to finalization.

The review indicates that the Board has received all relevant information on a timely basis to assist with its decision-making. There is no evidence to suggest improper decision-making on any aspect of budget management. Notwithstanding these important findings, the review identified the following opportunities for improvement in the future.

Observation

Implication

The processes described above in the overview section have evolved over time, but have not been recorded in formal policy or procedure documents.

Budgeting, forecasting and reporting processes, policies, and procedures are generally not documented or approved by the Board.

This review observed that the only documentation that existed was for the budget model methodology. This was documented in a narrative prepared for external auditor use.

Documented budgeting, forecasting and reporting processes, policies and procedures would help to ensure the completeness of the information provided to the Board in the future for decision-making.

Key Opportunities

Enhance policy and procedure documentation templates:

Develop a template for the monthly SOP review meeting and a documented procedure to guide the Finance team in preparing its reports:

Enhance budget variance reporting practices:

Enhance Board Reporting on variances between actual and forecasted results:

Objective #3 Review LAO’s balanced budget plan announced in December to confirm its feasibility

Overview: Balanced Budget Plan FY 2017/18

In response to the financial pressures exerted from financial and legal eligibility expansion, increased refugee costs, and other operational pressures, LAO developed a preliminary plan to return to a balanced operating budget over a two year period. For the purposes of this analysis, we relied upon the Board Briefing Note that was presented to the Board, which outlined the budget for FY 2017/18, as well as the strategies to mitigate identified pressures (“the Balanced Budget”) in combination with management discussion and additional financial support provided by Finance. This Board Briefing Note described the budget and mitigation strategies for FY 2017/18, as well as the projected operational deficits for FY 2018/19 and FY 2019/20.

In this section of the report below, we present some process-related observations and recommendations on the Balanced Budget Plan. In the section that follows this, we present an assessment of the feasibility of the plan.

Observations

Implication

1. The Balanced Budget does not include a formal risk analysis (i.e. risk, likelihood, impact).

The Balanced Budget outlined a number of major risks for the board to consider in relation to the Balanced Budget Plan, but did not identify the likelihood and impact for the identified risks. Specific risks for individual mitigation strategies were not documented in the Balanced Budget.

Ongoing risk assessment will help the Board understand the evolution of the Balanced Budget Plan as circumstances change.

2. The Balanced Budget plan is still evolving.

As plan development is still in progress, formal and detailed plans and timelines have not been developed or documented in all cases. For example:

  • Finding efficiencies in the delivery of the refugee program
  • Changing the service delivery model for the refugee program
  • Maintaining the Financial Eligibility funding for Clinics (no net new savings beyond FY 2016/17)
  • Requesting Clinics to return unspent funding (which was already incorporated in the opening pressure calculation for financial and legal eligibility expansion)

The development of the Balanced Budget Plan is not a static exercise. While good progress has been made, there is more work to do and the Board will need regular updates that track progress and identify new or changing pressures.

The creation of an overarching Balanced Budget Plan document with clearly defined accountabilities and monitoring processes is an important step. Such a document will support transparency and decision-making for the Board of Directors as well as serve as a consistent mechanism to report progress to MAG and other stakeholders.

3. The demand for refugee services and associated funding is a key pressure

LAO will require significant changes to the services provided to refugees if it is to operate within its current funding allocation. The Federal and Provincial government will need to be well informed of the impact and accept these changes or provide additional funding.

LAO does not have full control to make decisions it needs to make in order to mitigate the refugee pressure.

Key opportunities

LAO should consolidate the various briefing notes to the Board and further develop their detailed Balanced Budget Plan for the next three years, including:

LAO should formalize the budget monitoring process to monitor progress against each mitigation plan:

Feasibility of balanced budget plans

In response to the financial pressures, LAO developed a Balanced Budget Plan that includes an update on over ten mitigation strategies that collectively attempt to return LAO to a balanced operating budget over a three-year period.

LAO calculates that if no action was taken, the organization could be facing a $51.6 million deficit in FY 2017/18 as a result of the three financial pressures: financial / legal eligibility, refugee, and other operating pressures. In FY 2018/19, LAO asserts the mitigation strategies will address the majority of the financial pressures, as noted in Table 6 below. Thus, based on LAO’s projections, the savings presented in the mitigation strategies are insufficient to fully address the other operating pressures. In the first year, FY 2017/18, LAO has consciously planned for an $11.2 million operating deficit (approximately 2% of the forecasted funding in FY 2016/17). This plan reflects both the time it takes to realize some operational savings, as well as the need to continue providing services to target clients. Overall, this will result in an increase to the accumulated deficit. LAO management is continuing to explore and develop additional mitigation strategies to respond to these operating pressures.

Table 6: Net Financial Impact of LAO’s Mitigation Strategies FY 2017/18 - FY 2019/20 ($k)

Financial pressure   FY 2017/18 FY 2018/19 FY 2019/20
Pressures that vary each year:
Financial/Legal Eligibility        
Pressure1 A ($9,800) $0 $0
Mitigation strategies B $12,060 $14,240 $0
Net impact for the year C=A+B $2,260 $14,240 $0
Refugee      
Pressure D ($14,800) $0 $0
Mitigation strategies E $8,700 $0 $0
Net impact for the year F=D+E ($6,100)2 $0 $0
Recurring pressure (carryover between years):
Other Operating      
Opening pressure3 G ($27,000) ($7,370) ($6,560)
Mitigation strategies H $19,630 $810 ($880)4
Closing pressure I=G+H ($7,370)5 ($6,560) ($7,440)
Total estimated pressure in FY 2017/18 J=A+D+G ($51,600)    
Total Operating (Deficit) / Surplus6 K=C+F+I ($11,210) $7,680 ($7,440)

Note 1:Pressure is defined as the estimated difference between funding to be received and expenses to be incurred in the year. In relation to programs that involve certificates, the pressure varies on an annual basis since certificates have a three year lifecycle and therefore the costs in any one year reflect a combination of the certificate policies in place for the previous three years.

Note 2:LAO Management has estimated that the net refugee pressure in FY 2018/19 will be reduced to zero as a result of the combined impact of the previous three years’ certificate volume/cost reduction strategies (note that this is because certificates have a three year life cycle). Achievement of this target is dependent on achieving the FY 2017/18 planned savings. As of the date this report was written, Management had not provided support for the annual savings calculation to arrive at the estimated $6.1 million cost reduction in FY 2018/19.

Note 3:Other operating pressures in FY17/18 includes $14 million related to the cost of tariff increases, $3 million related to a reduction in the transfer payment, and $10 million in additional operating pressures

Note 4:This negative amount reflects the impact of new pressures that existing mitigation strategies do not fully mitigate (e.g. annual compensation increases).

Note 5: The Other Operating Pressure of $7.37 million calculated here does not align exactly with the $7.4 million pressure identified by LAO in Table 8, due to rounding.

Note 6:When LAO incurs a deficit, LAO is able to sustain operations from existing cash reserves.

The following table is a reconciliation of LAO’s financial pressures resulting from financial and legal eligibility expansion, as well as the cost estimates against approved funding.

Table 7: Financial/ Legal Eligibility (FE/LE) expansion Funding/Expenditure Cumulative Continuity Schedule (millions)

Financial/ Legal Eligibility expansion Revenues/expenses Actual
FY 2015/16
Forecast
FY 2016/17
Estimate
FY 2017/181
Estimate
FY 2018/191
Gross Operating Surplus/(Deficit) (5.6) (12.8) (9.8) 0.0
Clinics Surplus Retention   2.0    
Forecast reduction of 2,000 Family certificates     1.3 3.8
Suspension of LET 10,220 certificates     10.8 10.4
Net FE/LE Operating (deficit) / surplus (5.6) (10.8) 2.3 14.2
Accumulated FE/LE (deficit) / surplus (5.6) (16.4) (14.1) 0.1

Note 1: This estimate is based on LAO’s original business case and request for funding in relation to financial and legal eligibility expansion, however this funding has not yet been formally approved.

At this point, all mitigation strategies presented are to take effect in FY 2017/18 or are already in place and have resulted in recurring savings that were first realized in FY 2016/17. LAO is in the process of identifying additional savings which could be applied against the remaining operating pressures. Given this, and the fact that LAO’s business is continually evolving so it is difficult to predict multiple years into the future, the focus of the Balanced Budget Plan analysis was on LAO’s FY 2017/18 plan.

FY 2017/18 Balanced budget plan

This review is based on LAO Board materials on the Balanced Budget Plan, in combination with management discussion and additional financial support provided by Finance. LAO has documented a number of mitigation strategies by pressure and estimated the financial impact for most individual strategies as summarized in the following table:

Table 8: Recalculation of LAO’s financial pressures and mitigating strategies for FY 2017/18

A. Financial eligibility pressure ($9,800,000)
Less Mitigation Strategies:  
        A1. Reducing the criminal certificate expanded legal eligibility coverage, except for the most vulnerable clients, and referring those no longer covered to duty counsel for representation (estimated reduction of 10,220 certificates or $10.8 million), as well as a forecast reduction in demand of 2,000 Family certificates (estimated $1.3 million) $12,100,000
  Total: $12,100,000
Total net surplus per LAO $2,260,000
B. Refugee pressure ($14,800,000)
Less Mitigation Strategies:  
  B1. Additional funding from the Federal Government $1,700,0001
  B2. Finding efficiencies in the delivery of the program $7,000,0002
  B3. Changing the service delivery model
  B4. Making service reductions
  Total $8,700,000
Total net shortage per LAO ($6,100,000)
C. Other operating pressures ($27,000,000)
  C1. Achieve vacancy savings in the year $5,000,000
  C2. Reducing administrative costs (completed at the end of FY 2016-17, recurring savings) $2,400,000
  C3. Scaling back the Articling Students Program ($0.8MM achieved in FY 2016-17) $1,500,000
  C4. Service delivery model enhancement initiatives to achieve savings $6,000,000
  C5. Requiring clinics to return their operating surpluses (completed at the end of FY 2016-17) $1,100,000
  C6. Freezing compensation at FY 2016/17 levels for LAO staff and limiting new compensation funding for clinics in FY 2017/18 while maintaining LAO’s commitment to the clinics of 1% pay equity $3,400,000
  C7. Optimize Area Committee under sec.30 $200,000
  Total $19,600,000
Total net shortage per LAO ($7,400,000)

Note 1: At the time that this report was written, the Federal Budget had been released, however the detailed allocation to LAO was not yet confirmed. However, based on the expected allocation, LAO expects to receive approximately $1.7 million

Note 2: The $7 million represents LAO’s target for the combination of Finding efficiencies in the delivery of the program, Changing the service delivery model, and Making service reductions. At the time this report was written, LAO was still in the process of developing plans to achieve these savings.

Assessment of the balanced budget plan

Through our analysis of the information provided by LAO, the following risk factors were identified that impact the likelihood of success for the following mitigation strategies.

Criminal/Family certificates

Overview of A1:

Risk factors impacting the ability to implement plans and realize all proposed savings:

Clinics

Overview of C5 and C6:

Risk factors impacting the ability to implement plans and realize all proposed savings:

Refugee

Overview of B1, B2, B3 and B4:

Risk factors impacting the ability to implement plans and realize all proposed savings:

Vacancy savings

Overview of C1:

Risk factors impacting the ability to implement plans and realize all proposed savings:

Compensation

Overview of C6:

Risk factors impacting the ability to implement plans and realize all proposed savings:

Other opportunities to save costs or generate revenue:

Through discussion with management and examination of Board documentation, this review identified additional sources of funding that may positively impact the budget, but which were not included in the budget plan calculations.

Law Foundation of Ontario Funding

Overview:

Risk factors impacting the ability to implement plans and achieve potential revenue:

Potential financial impact of risk factors:

New mitigation strategy: Law Foundation of Ontario funding increase due to BOC rate increase

Potential amount: $0-$5,000,000 in additional revenue

Management continues to examine other cost saving or revenue generation measures that were in varying stages of development at the time of this review. As appropriate, these will be brought to the Board for decision.

Other key observations

Through analysis of the information available, this review identified that:

Conclusion

Overall, this review identified that good progress has been made on the Balanced Budget Plan, however, LAO still needs to perform more work in order to develop a comprehensive plan that will lay out a clear path to balancing the operating budget. As noted above and by design, the budget plan is not yet balanced for 2017/18 as mitigation strategies proposed to date do not yet include a detailed plan to mitigate the remaining $7 million in refugee pressures. This plan may take some time to develop, and LAO has recognized that there is a high risk that they will not achieve their targeted refugee savings in the current year. In addition, there are varying levels of uncertainty associated with many of the mitigation strategies as many are reliant on outcomes which are not exclusively in the power of LAO and are therefore subject to a high risk of volatility (e.g. financial impact of service reductions). Significant changes are still occurring in the budget based on new information (i.e. funding and results of cost savings) and newly developed strategies, which also increases the unpredictability of LAO achieving its targets. In summary, the planned path to balance the operating budget is feasible but not without risks and implementation challenges.

LAO would benefit from consolidating its mitigation strategies into one comprehensive budget document, outlining each mitigation strategy in detail, detailed plans for achieving the targeted savings, a detailed risk analysis, and accountabilities for implementing mitigation plans, associated tasks, timelines, and progress to date.

In addition, given potential negative stakeholder reaction, LAO will require significant support. Difficult choices will need to be made; LAO is delivering an important service to support the lowest income Ontarians and should be supported in its focus on its core mandate.

Appendix A: Criteria

To focus our efforts, the following criteria were used to assess each of the three objectives of the review.

Objective 1: Assess LAO’s forecasting methodology regarding financial and legal eligibility

Key steps Criteria

Understand forecasting methodology procedures for financial and legal eligibility

  1. Procedures exist to support forecasting processes for financial and legal eligibility.
  2. Procedures have been communicated to the responsible parties.
  3. Policies are maintained and approved on a regular basis
  4. Financial and legal eligibility forecasts are reviewed and approved.

Perform a walk-through of the forecasting process to validate process against actual practice

  1. Procedures are followed

Validate forecast information to underlying source documentation to determine reasonableness of forecast amounts established

  1. Source financial forecast data are tied to approved financial statements and systems
  2. External data to estimate certificate demand is validated against verifiable sources

Assess reasonableness of assumptions used in the forecasting process

  1. Key assumptions for the budgeting and forecasting process are identified and defined
  2. Key assumptions are reasonable, reviewed and approved by management
  3. Regions provide insights to the forecasting process (e.g. certificates)
  4. Forecasting is periodically updated to reflect environmental changes
  5. Work in Progress (WIP) model is incorporated in the Certificate Forecasting model

Ensure forecasted financial and legal eligibility adequately reflect current trends

  1. Forecasts are updated on at least a quarterly basis
  2. Budget variance analysis is used to update forecasts
  3. A formal process exists to incorporate budget amendments (if required)
  4. Budget forecasts incorporate current trends.
  5. Detailed scenario planning is conducted on a regular basis

Objective #2: Review LAO’s internal governance and decision-making procedure as it relates to budget management

Approach Criteria

Review process documentation for the budget governance and decision-making procedures

  1. Procedures exist to support budget governance and decision-making procedures, including how restricted funding (i.e. funding contributions) is classified and recorded.
  2. Procedures exist to ensure that the Ministry is informed on budget progress
  3. Policies are maintained and approved on a regular basis
  4. Budgets are aligned to strategic and operational plans and objectives

Perform a walk-through of budget governance and decision-making procedures to validate process against actual practice

  1. Procedures are followed.

Review budget variance analysis and consider sufficiency of variance analysis to understand underlying cost and revenue factors and predict costs and revenues to year end

  1. Procedures are followed.
  2. Actual expenditures are compared to budget regularly.
  3. Major cost drivers, underperforming areas and significant variances are identified and analyzed by management.
  4. A plan to correct / mitigate major cost drivers, underperforming areas and significant variances is developed.
  5. Correction / mitigation plans are implemented and monitored.

Review process for communicating financial results to the Board of Directors. Assess the effectiveness of the documentation provided in conveying LAO’s situation and the process for addressing areas of concern

  1. Variances are reported to senior management and the Board.

Assess the extent to which budget variance analysis and performance management tools are used to review practices and alter service delivery decisions where necessary

  1. Performance metrics are analyzed as part of the financial monitoring processes
  2. Performance metrics are reviewed when service delivery options are assessed.

Objective #3: Review LAO’s balanced budget plan announced in December to confirm its feasibility

Approach Criteria

Assess the feasibility of the LAO’s balanced budget plan

  1. Understand the historical financial events that led to the current budget deficit, including developing an understanding of the legislative framework that LAO operates within (LASA)
  2. Understand the circumstances and risks related to ongoing LAO cash flow
  3. Key non-operational assumptions (e.g. external funding) in the balanced budget plan are reasonable.
  4. LAO’s balanced budget plan for the next three to five years is reasonable and feasible to ensure that LAO remains within the allocated budget

Appendix B: Service/department descriptions

The boxes below identify the various LAO departments/service offerings as well as a brief description of the service and the programs offered.

Certificate program

LAO issues certificates to individuals seeking legal aid assistance. Each certificate issued authorizes legal services to be performed by a private lawyer within the tariff guidelines. Individuals can apply for the program if they are financially and legally eligible (i.e. service is covered).

Services offered

Duty Counsel program

Duty counsel are lawyers who give immediate legal assistance to low-income people appearing in court without a lawyer. Duty counsel expenses include duty counsel fees and disbursements, as well as expanded duty counsel (i.e. The program which uses staff duty counsel/per diem duty counsel, with clerical support and aims to dispose of matters whenever possible, rather than simply to remove matters from that day’s court docket).

Services offered

Clinic program and special services

LAO provides funding to 76 independent community legal clinics in Ontario, enabling them to provide poverty law services to the community they serve on a basis other than fee for service. The community clinics are organizations structured as corporations without share capital and are governed and managed by a board of directors. Community clinics are independent from, but accountable to, the Corporation under Sections 33 to 39 of the Legal Aid Services Act, 1998. Each community clinic is independently audited and is required to provide audited financial statements to the Corporation for the funding period.

Services offered

Service innovation projects

LAO’s Service Innovation Projects were initiated with the purpose of providing additional support to LAO’s vulnerable clients. These strategies are developed to support the legal needs of client groups that LAO’s has deemed to be particularly vulnerable and who are overrepresented in the justice system.

Services offered

Program support

Includes the call centre

Services offered

Appendix C: Expanded legal eligibility services

  1. Criminal law: LAO expanded criminal law services to include accused persons facing secondary consequences if they received a conviction.
  2. Family law: In relation to family law cases, LAO expanded the definition of complex cases for certain types of cases and certain client vulnerabilities; these associated cases that would then meet the definition of a complex case would then require more expensive certificate representation. LAO also expanded certificate coverage in child protection matters before a formal child custody application has been brought, and for non-parental third party representation in child custody cases.
  3. Refugee law: LAO expanded their refugee services to include the previously unfunded challenges to removal and deportation orders, as well as humanitarian and compassionate applications under the Immigration Act.
  4. Mental health: LAO expanded criminal law services to include first time accused persons who were mentally ill, introduced new certificate coverage to assist those seeking to remove a statutory guardian, and introduced certificate coverage in matters before the Consent and Capacity Board to remove a substitute decision-maker or respond to an application that a person is incapable of managing their property.
  5. Domestic violence: LAO expanded criminal law services to include first time accused persons who were victims of domestic violence.
  6. First Nations, Metis and Inuit: LAO expanded criminal law services to include first time accused persons who were Aboriginal.
  7. Bail: LAO introduced a number of expansion initiatives related to bail, which resulted in increased hours for existing certificates, but did not increase the number of certificates.

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