Ottawa repackaged First Nations funding, but left reform unfinished

A report from Auditor General Karen Hogan says Ottawa invested the money it promised as part of a decade-long effort to build a new fiscal relationship with First Nations, but failed to put the deeper pieces in place.

“Last year… I talked about the government needing to really transform the way it interacts with First Nation communities and I was hopeful that the new fiscal initiatives would be different. I think that it fell short in meeting its mark,” said Hogan at a press conference following the release of the report.

By the end of the 2024–25 fiscal year, Indigenous Services Canada (ISC) had provided more than $6.5 billion in funding to 191 First Nations, Tribal Councils, and education and health authorities through 10-year grants.

But the goal was supposed to be more than simply providing federal funding.

It was meant to help First Nations move toward greater self-government, with better support for financial management and mutual accountability between First Nations governments and Canada.

But Hogan found the federal government did little to help First Nations meet reporting requirements or build the capacity needed to manage funding on their own terms.

“It took existing funding, repackaged it into a long-term, predictable and a stable set of funding, but the really transformative things that should have happened just are underdeveloped right now,” said Hogan.

In addition, Hogan criticized Ottawa for failing to create a system to measure whether the new fiscal arrangements improved housing, services, governance or daily life for the people they were supposed to serve.

The 2016 promise to overhaul First Nations funding

In July 2016, the Assembly of First Nations (AFN), then led by Perry Bellegarde, and then-Indigenous and Northern Affairs minister Carolyn Bennett, signed a memorandum of understanding meant to change how First Nations are funded.

The MOU came after years of criticism that the existing system was not working.

Funding decisions were largely made in Ottawa. Money was allocated on a short-term, year-by-year basis and often tied to specific programs.

The short-term nature of the funding made it difficult to plan ahead, and the reporting requirements buried First Nations governments in paperwork.

First Nations governments were left to administer the money according to federal rules and had little room to make their own decisions.

It was a common complaint that the funding system meant chiefs were more accountable to ISC than to their own citizens when deciding how programs and services should be delivered.

In fact, the federal funding system was so heavily focused on compliance — making sure each dollar was spent as Ottawa directed — that First Nations leaders said little attention was paid to whether programs were actually improving housing, education, water, health or other conditions in their communities.

In other words, the system asked whether First Nations spent every dollar as Ottawa said to, not did the money make a difference, or was it enough?

Much of the background to the discussions is preserved in the report A new approach: Co-development of a new fiscal relationship between Canada and First Nations

Under the 2016 MOU, Canada and the AFN agreed to develop options for significantly overhauling the funding system.

The work led to three main promises.

First, Ottawa was supposed to support better financial reporting and help First Nations manage funding on their own terms.

That included replacing the old system used when a First Nation was in financial trouble — a system that mainly stepped in after problems had already happened, rather than helping communities build capacity before they reached a crisis.

Second, the new system was supposed to create mutual accountability, meaning First Nations would be accountable to their citizens, and Ottawa would also be accountable to First Nations.

Third, funding was supposed to become longer-term, more flexible and focused on whether programs were actually improving people’s lives — not just whether every dollar was spent according to federal rules.

The auditor general looked at those three promises and found Ottawa had delivered pieces of the plan, while leaving some of its most important work undone.

The Default Prevention and Management Policy

One of the clearest examples was Ottawa’s system for dealing with First Nations in financial distress.

First Nations said overspending often happened because federal funding was not enough, or because communities had to “rob Peter to pay Paul” when urgent local needs came up.

Under strict funding agreements, that was not allowed for because Ottawa had earmarked funds for specific programs.

First Nations have also failed audits because they lacked the staff or financial expertise needed to meet Ottawa’s reporting rules.

Ottawa’s solution for First Nations that overspent or failed their audits was known as the Default Prevention and Management Policy.

The policy gave the federal government three levels of intervention. A First Nation could be required to create a plan to fix the problem. It could be ordered to bring in an advisor.

Or, as a last resort, Indigenous Services Canada could appoint an outside manager – commonly known as third-party management- to directly control the federal funding going to the First Nation, overriding the elected leaders.

For First Nations, the system felt punitive and rarely fixed the problems that caused financial distress in the first place, such as inadequate funding or a lack of training and support for financial administration, according to past auditor general reports.

In 2017, Canada committed to a new system focused on prevention and building financial expertise.

The auditor general’s report found that work was not completed.

Instead, by 2023, Ottawa had removed the lower levels of intervention and kept the most severe tool, third-party management.

Currently, there are no First Nations under third-party management, according to ISC.

In the government’s reply to the auditor general’s report, ISC said it had drafted a replacement policy focused on prevention and capacity-building, but it was never implemented because the department lacked the funds to implement the new training and policy. Without that funding, the new policy was shelved.

Two-way accountability.

Indigenous Services Minister Mandy Gull-Masty Photo: APTN

First Nations have long argued that when Ottawa decides in advance how funding must be spent, and then holds First Nations leaders accountable for administering those dollars as directed, it creates a governance problem.

First, chiefs and councils are elected by their citizens, but the funding system can make them more accountable to Indigenous Services Canada than to the people they serve. Second, the directives and short-term nature of the funding leave them with little flexibility to redirect money where they believe it will have the most impact.

In the 2016 MOU referenced in the auditor general’s report, Ottawa and First Nations agreed the solution was a mutual accountability framework.

“We have nation-to-nation accountability between the federal government and provinces and territories. There are transfers around health that go to provinces and territories, and there is an accountability back at a certain level. But provinces and territories are allowed to decide what to do with that funding.  And it’s that kind of mutual nation-to-nation relationship that I think would change part of how the federal government right now interacts with First Nations organizations and governments,” said Hogan.

In plain terms, Ottawa and First Nations were supposed to develop a framework that would let First Nations governments answer first to their own citizens, while also allowing First Nations and the federal government to hold each other accountable for the commitments they made to one another.

The goal was to move closer to a true nation-to-nation relationship, where success was not defined by Ottawa alone. First Nations and the federal government were supposed to agree on what success looked like, how it would be measured, and who would be held accountable when commitments were not met.

“So really creating the better capacity for some smaller communities to be able to meet some of the requirements and creating a mutual accountability framework that would allow there to be nation-to nation accountability, but also accountability between First Nations and their citizens,” said Hogan. Those are things that they outlined – First Nations partners outlined —that’s what they wanted this to look like.  And the federal government just hasn’t delivered on,” said Hogan.

The auditor general found the work on mutual accountability was never completed.

Indigenous Services Canada said the process stalled because it could not reach agreement with First Nations on how accountability should be measured.

“On the mutual accountability framework, engagement with First Nations showed that partners do not support a single, static framework but instead support an adaptable, First Nations-led approach that evolves over time,” said Gull-Masty.

“We are continuing to work with First Nations partners to advance a renewed approach to accountability that reflects their priorities and realities, while also strengthening governance and financial capacity supports needed to support its implementation.”

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Long-term Flexible funding.

Despite the roadblock on the mutual accountability framework, the government flowed long-term funding anyway.

By the end of the 2024–25 fiscal year, Indigenous Services Canada had provided 10-year grants to 191 First Nations and First Nation governance groups. The grants totalled approximately $6.5 billion.

The auditor general found that the distribution of the grants was successful, with every eligible recipient receiving the funding.

But Hogan also flagged a weakness.

When a First Nation first applies for a 10-year grant, the First Nations Financial Management Board reviews five years of audited financial statements to make sure the community’s finances are in good shape.

First Nations met the financial requirements when they first applied for the grants.

But in later years, some recipients no longer met the requirement to submit annual audited financial statements. In a sample of 36 files from the 191 recipients, the auditor general found 61 per cent had not submitted the required reports, while six had no reports on file at all.

The auditor general said the non-compliance was not intentional, but systemic, because some First Nations did not have the administrative staff to prepare the files, and could not secure the private auditors as the policy required.

Without those audits, the First Nations Financial Management Board could not provide the reports Indigenous Services Canada needed.

That left the department operating partly in the dark, even as it continued to send the money.

In its response, ISC acknowledged that the financial capacity challenges included limited access to private auditing services. The department said the Band Support Funding program helps offset the cost of annual audits and other professional services, and said further work is underway to strengthen governance capacity and improve access to supports.

“We are also taking steps to address challenges identified in the report, including supporting First Nations in meeting financial reporting requirements and improving the use of available data to better measure results.”

ISC also said the availability of recent audited financial statements improved to 65 per cent in 2024–25, up from 39 per cent in the auditor general’s sample. The department said it will aim to exceed 70 per cent for the 2025–26 monitoring process.

No clear way to know if lives improved

Even if every audit had been filed, Hogan found there would still be a deeper problem.

ISC never created a system to measure whether the move to 10-year grants was improving people’s lives.

The department said it planned to use Statistics Canada’s community well-being index, but the auditor general said that was not a strong enough measure for two reasons.

First, the index is only released every five years, with the next update expected in 2026. Second, there was no way to know whether any improvement in people’s lives — such as higher graduation rates or better health outcomes — was caused by the new fiscal system, or by something else.

In the end, ISC could show the money went out but it couldn’t show whether the money made a difference.

According to the auditor general, ISC missed a major opportunity.

The auditor general noted that ISC already collects detailed data on housing, education, infrastructure and other services, and it could have built that information into the grant program, but it didn’t.

Hogan had previously flagged the problem in 2018.

In its response, ISC agreed it needed better indicators — measures that actually track whether conditions are improving, such as high school graduation rates, housing adequacy and reliance on income assistance.

“Advancing a new fiscal relationship with First Nations remains a key priority, grounded in co-development with First Nations partners, including the Assembly of First Nations and First Nations-led institutions, to move toward predictable and flexible funding that supports self-determination,” said Gull-Masty.

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