Risks to the Fiscal Plan
The major risks to the fiscal plan stem mainly from changes in factors that government does not directly control. These include:
- Assumptions underlying revenue, commercial Crown corporation, and service delivery agency forecasts such as economic factors, commodity prices and weather conditions.
- The outcome of litigation, arbitrations, and negotiations with third parties.
- Potential changes to federal transfer allocations, cost-sharing agreements with the federal government and impacts on the provincial income tax bases arising from federal tax policy changes.
- Utilization rates for government services such as health care, children and family services, and employment assistance.
In addition, changes in accounting treatment or revised interpretations of generally accepted accounting principles (GAAP) could have material impacts on the bottom line.
Table 2.24 summarizes the approximate effect of changes in some of the key variables on the surplus. However, individual circumstances and inter-relationships between the variables may cause the actual variances to be higher or lower than the estimates shown in the table. For example, an increase in the US/Cdn dollar exchange rate may be offset by higher commodity prices.
In Budget 2008, the government continues its prudent approach of building forecast allowances into the bottom line to act as a cushion against possible deterioration in revenue or spending forecasts, and thus increase the certainty of meeting the surplus targets established in the fiscal plan.
Forecast allowances of $750 million in 2008/09, and $675 million in each of 2009/10 and 2010/11 are included the budget. The Budget Transparency and Accountability Act requires disclosure of such adjustments to the most likely fiscal result.
Corresponding borrowing forecast allowances have also been included in the provincial debt forecast for 2008/09 through 2010/11, increasing the total debt forecast compared to the most likely forecast.
Own Source Revenue
The main areas that may affect own source revenue forecasts are BC’s overall economic performance, the exchange rate and commodity prices.
Revenues are sensitive to economic performance. For example, taxation and other revenue sources are driven by economic factors such as personal income, retail sales, population growth and the exchange rate. The revenue forecast contained in the fiscal plan is based on the economic forecast detailed in Part 4: British Columbia Economic Review and Outlook.
Revenues in British Columbia are also volatile, largely due to the influence of the cyclical natural resource sector in the economy and the importance of natural resource revenues in the province’s revenue base. Spikes in commodity prices such as natural gas, or low lumber prices (as are currently being experienced) may have a positive or negative effect on natural resource revenues in the near term, until supply/demand imbalances level out.
Income tax revenues can be affected by timing lags in reporting current and prior years tax assessments by the Canada Revenue Agency.
Federal Government Contributions
Potential policy changes regarding federal transfer allocations and cost-sharing agreements could also affect the revenue forecast. However, due to insufficient information on specific proposals, it is speculative to estimate the fiscal impact with any degree of certainty. As a result, the fiscal plan includes only those commitments made to the Province by the federal government.
In particular, the federal government recently announced a $1 billion dollar Community Development Trust, of which BC’s estimated per capita share is $129 million; however, neither revenue nor associated spending plans have been reflected in Budget 2008. Revenue has not been included in the budget as the accounting treatment of these funds has not yet been finalized. Spending plans will be prepared based on community needs and in line with the purposes of the trust. An update on the impacts of this trust will be reflected as part of the first Quarterly Report for 2008/09.
Budget 2008 does not include any federal funding or associated spending in respect of labour market agreements currently being negotiated with the federal government.
Details on major assumptions and sensitivities resulting from changes to those assumptions are outlined in Appendix Table A10.
Commercial Crown Corporations
Crown corporations and agencies have provided their own forecasts. These forecasts, as well as their statements of assumptions were used to prepare the fiscal plan. The boards of those corporations and agencies have also included these forecasts, along with further details on assumptions and risks, in the service plans being released with the budget.
The fiscal plan does not assume or make allowance for extraordinary adjustments other than those noted in the assumptions provided by the Crown corporations and agencies. Factors such as electricity prices, water inflows into the BC Hydro system, accident trends, interest/exchange rates, decisions of an independent regulator, or pending litigation could significantly change actual financial results over the forecast period. BC Hydro’s and ICBC’s results may be affected by the outcome of BC Utilities Commission decisions on current and future rate applications.
New decisions or directions by Crown corporation boards of directors may result in changes to costs and revenues due to restructuring, valuation allowances and asset write-downs, or gains and losses on disposals of businesses or assets.
Three-year aggregate financial plans for the SUCH sector have been developed by the Ministries of Health, Education and Advanced Education based on broad policy assumptions and the funding for SUCH sector organizations included in the respective ministry budgets. Since these are aggregate plans, they have not been signed off by the boards of the health authorities, universities and colleges or school districts.
Due to the on-going work stemming from the Conversation on Health, including new legislation and other policy changes, government has not communicated funding decisions to health authorities in advance of this years’ budget. Similarly, government is assessing progress against its plan to increase access to post secondary education, particularly given the significant challenges with labour and skills shortages. As a result, funding information was not provided to universities and colleges prior to budget.
Final financial plans, based on government funding to be communicated after budget, are still subject to formal approval of the respective boards. Final approved plans may, therefore, differ from the ministry developed forecasts included in the budget.
The spending forecast contained in the fiscal plan is based on ministry and taxpayer-supported Crown corporation and agency spending plans and strategies. Details on major assumptions and sensitivities resulting from changes to those assumptions are shown in Appendix Table A12 and in ministry service plans. The main spending issues follow.
Many of the wage agreements reached in the last round of public sector negotiations expire by the end of 2009/10. In 2010/11, Ministry of Health funding growth is maintained at the same rate as for the previous year to accommodate wage increases in that sector, and an increased contingency vote allocation has been provided for other sectors.
A Contingency vote of $375 million is included in 2008/09, rising to $390 million in 2009/10 and $400 million in 2010/11. These contingencies represent roughly 1 per cent of overall government expense.
The contingency amounts provide $75 million for the Innovation and Integration Fund. This fund will assist health authorities in implementing best practices and in integrating and coordinating the delivery of health services.
The work of the Climate Action Secretariat and the Climate Action Team is in its initial stages, and the Citizen’s Conservation Council has yet to be established. These groups, as well as other entities in government, could propose additional initiatives worth pursuing and therefore an allocation of $62 million over three years has been provided for within the contingencies vote.
The contingency amounts also include the remaining $79 million contingency that is earmarked to help address cost uncertainties in areas related to staging and hosting the 2010 Winter Olympic and Paralympic Games (2010 Winter Games), including security. Both the Province and Canada are continuing to review the various planning assumptions to be used in finalizing the security budget for the 2010 Winter Games. However, the level of security resources ultimately committed will depend on various factors, including broader domestic and international conditions leading up to and during the 2010 Winter Games. As such, the security area will continue to represent a risk requiring close monitoring and attention.
The allocation to contingencies is a prudent budgeting measure that protects the three-year fiscal plan from:
- unforeseen and unbudgeted costs that may arise; and
- pressures for costs that are currently budgeted based on estimates whose final value are impacted by external events or prices.
Contingencies – Compensation
Budget 2008 includes $400 million in 2010/11 for the next round of wage and benefit contract negotiations.
Public Sector Program Delivery
The vast majority of government-funded services are delivered through third party delivery agencies that provide programs such as acute and continuing health care, K–12 education, postsecondary education, and community social services. All of these sectors face cost pressures in the form of program demand and non-wage inflation. The government also funds a number of demand-driven programs such as PharmaCare, K–12 education, student financial assistance and income assistance. The budgets for these programs reflect the best estimates of demand and other factors such as price inflation. If demand is higher than estimated, this will result in a spending pressure to be managed.
Treaty Negotiations and the New Relationship
The provincial government is committed to building a new relationship with First Nations and Aboriginal people based on mutual respect, recognition, and reconciliation of Aboriginal rights and title. The vision for the New Relationship was established in 2005 and government continues to partner with Aboriginal leadership to develop new means and structures that promote co-operation and workable arrangements with a goal of closing the gap that exists between Aboriginals and other British Columbians.
Government remains committed to negotiating treaties which provide certainty regarding ownership and use of provincial Crown land and resources. In November 2007, legislation to establish the first two treaty Final Agreements under the BC Treaty Commission process, with the Maa-nulth and Tsawwassen First Nations, received Royal Assent in the British Columbia legislature. Both Final Agreements have been ratified by the respective First Nations and now require signing and legislative approval by the federal Parliament before taking effect. Implementation and settlement costs associated with the two Final Agreements have been accounted for in the fiscal plan. Government continues to negotiate treaties and their impact on the fiscal plan will depend on the outcome of negotiations.
Government is also considering new types of lasting agreements between the province and First Nations that provide land and resources to support the immediate social and economic needs of Aboriginal communities. The nature of these new agreements is evolving and will likely have associated costs that impact the fiscal plan.
The province is involved in litigation with First Nations relating to aboriginal rights. Settlement of these issues, either in or out of court, may result in additional costs to government.
The capital spending forecasts assumed in the fiscal plan may be affected by a number of the various factors listed below:
- weather and geotechnical conditions causing project delays or unusual costs;
- changes in market conditions, including service demand, inflation and borrowing costs;
- the outcome of environmental impact studies;
- the accuracy of capital project forecasts;
- the successful negotiation of cost-sharing agreements with other jurisdictions;
- the application/interpretation of accounting treatments;
- the success of public-private sector partnership negotiations; and
- rising building material costs and upward pressure on wages stemming from shortages of skilled workers.
The Public Service, Teachers, College and Municipal Pension Plans – the four major public service plans – are joint trusteeship plans. Actuarial evaluations are conducted on each plan every three years, and a report is received within one year of the evaluation. In the event that the actuarial evaluation indicates a plan deficit, the pension boards are required to address the shortfall by contribution adjustments or other means.
- The most recent actuarial valuation report for the Public Service Pension Plan as of March 31, 2005 indicated a $767 million liability. Contribution rate increases of 1.88 per cent for both members and employers were required effective April 1, 2006 to address the deficit.
- The most recent actuarial valuation report for the Teachers’ Pension Plan as of December 31, 2005 indicated a $904 million liability. Contribution rate increases of 1.61 per cent for both members and employers were required effective July 1, 2007.
- The most recent actuarial valuation report for the College Pension Plan as of August 31, 2006 indicated a $54 million liability. Contribution rate increases of 0.51 per cent for both members and employers were required effective September 1, 2007.
- The most recent actuarial valuation report for the Municipal Pension Plan as of December 31, 2006 indicated a surplus of $438 million.
- The next actual valuation report for the Public Service Pension Plan as of March 31, 2008 is expected to be received by March 31, 2009; the report for the Teachers’ Pension Plan as of December 31, 2008 is expected to be received by December 31, 2009; the report for the College Pension Plan as of August 31, 2009 is expected to be received by August 31, 2010; and the report for the Municipal Pension Plan as of December 31, 2009 is expected to be received by December 31, 2010.
Catastrophes and Disasters
The spending plans for the Ministries of Forests and Range and Public Safety and Solicitor General include amounts to fight forest fires and deal with other emergencies such as floods. These amounts are based on historical averages of actual spending and on conditions of normal to moderate severity. Extreme occurrences may affect expenses in these ministries and those of other ministries.
The spending plan for the Ministry of Attorney General contains provisions for payments under the Crown Proceeding Act based on estimates of expected claims and related costs of settlements likely to be incurred. Litigation developments may occur that are beyond the assumptions used in the plan (for example, higher-than-expected volumes, or size of claim amounts and timing of settlements). These developments may affect government revenues and/or expenditures in other ministries.
One-time Write-downs and Other Adjustments
Ministry budgets provide for anticipated levels of asset or loan write-downs where estimates can be reasonably predicted. The overall spending forecast does not make allowance for extraordinary items other than the amount provided in the contingency vote.