TORONTO - Ontario's Liberal government has "institutionalized'' the habit of spending surplus funds at the end of the fiscal year instead of applying the extra cash to the provincial debt or deficit, Auditor General Jim McCarter said Monday.

In his first pre-election review of the Liberal government's fiscal plans for the next three years, McCarter said the government has been creating lists of candidates who could receive year-end grants long before the end of the fiscal year.

"The government has somewhat institutionalized the practice by identifying candidates for possible year-end transfers earlier in the fiscal year to facilitate the decision-making process if it becomes apparent, late in the year, that there will be surpluses,'' McCarter wrote.

"The combination of such revenue surpluses (and) the tight timelines involved in these year-end spending decisions . . . has resulted in a significant reduction of the normal accountability controls over these transfers.''

The government said it always has more groups requesting funding than it has money at budget time, so there is always a list of possible grant recipients available at the end of each fiscal year.

McCarter also found that changes in accounting procedures in 2005 resulted in schools and hospitals -- which used to benefit from year-end money -- now getting very little of the surplus cash.

Hospitals and school boards are now part of the government for accounting purposes, which means unspent money they have left over is reflected as a government asset, not as an expense.

Municipalities received $1.4 billion of the almost $1.6 billion in year-end spending last year.

McCarter said he was concerned that sound policy and business decisions were being unduly influenced by the need to "get the funds out the door'' quickly at year's end, and by the new accounting rules.

But Finance Minister Greg Sorbara said schools and hospitals need less year-end cash now because they have received the largest increases in funding of all ministries, and rejected the suggestion that surplus money was going to municipalities because it would help the government keep to its budget projections.

"Notwithstanding that there's a somewhat different accounting treatment for hospitals and school boards, that has not influenced us as to where we ought to apply additional revenues derived during the year,'' he said.

However, the opposition parties said the Liberals were using the extra cash at year end to make the books look good, and to reward groups with ties to the Liberal party just months before the Oct. 10 election.

"They're finding it very convenient to give it out to people where it can be hidden, where it can be given out at the last minute and where they can try to make political friends in an election year,'' said NDP finance critic Michael Prue.

"We have seen the McGuinty government routinely downplay the amount of revenue they're bringing in and overplay the interest expenses to give themselves a big cushion at the end of the year, which they then blow out the door in a mad-money spending spree,'' said Conservative critic Tim Hudak.

The Liberals have come under heavy criticism for giving out $32 million in year-end grants to various ethnic groups over the last two years -- many with ties to the Liberal party -- without any formal application process.

McCarter's report, which described the government's fiscal predictions as conservative, is the first since the governing Liberals passed a law requiring an independent audit of the province's books before every Ontario election.

After the Liberals won the 2003 election, they accused the previous Conservative government of leaving behind a hidden $5.6-billion deficit.

Premier Dalton McGuinty blamed the huge shortfall for his decision to break a promise not to raise taxes with a new health tax of up to $900 for every worker, and vowed no other new government would have to face the unexpected financial crisis that his did in 2003.

"The previous government's approach to balancing the budget was to count on phantom revenues like asset sales which they knew would not materialize,'' Sorbara said.