Part 1: THREE-YEAR FISCAL PLAN

Introduction

Budget 2005 delivers on government's legislated commitment to balance provincial budgets beginning in 2004/05, tabling a second balanced budget. Following an estimated surplus of $1.44 billion in 2004/05 driven by strong economic performance, high commodity prices, increased federal transfer payments and improved net incomes of commercial Crown corporations, the updated fiscal plan forecasts a surplus of $220 million for 2005/06, and surpluses of $200 million for each of the 2006/07 and 2007/08 fiscal years.

The updated fiscal plan realizes the benefits of the fiscal and economic strategy set out in February 2002, that was based on two main elements:

• building a strong, vibrant and competitive economy; and
• balancing the budget beginning in 2004/05 while protecting funding for health care and education.

Government has successfully met its budget targets for each of the last three years. The economy is now gathering momentum (government's economic development initiatives to ensure the British Columbia economy remains competitive are summarized in the British Columbia's Strong and Vibrant Economy topic box on page 72). In November 2004, Standard and Poor's upgraded its BC credit rating to AA from AA-. In making this decision, the rating agency noted BC's record for consistently meeting annual budgetary targets, solid economic performance, enhanced transparency of budgetary reporting, and relatively low tax-supported debt burden.

Total provincial debt at the end of 2004/05 is forecast to total $36.1 billion, a $1.7 billion reduction from 2003/04. This is the largest annual debt reduction in BC history. Government direct operating debt – the debt resulting from cumulative deficits and surpluses of the Consolidated Revenue Fund – falls $1.5 billion from 2003/04.

To meet the transportation, health and education infrastructure needs of a growing economy, significant capital investments are planned over the coming years. These investments will result in additional debt.

However, consistent with government's strategic plan commitment, the taxpayer-supported debt to GDP ratio continues to fall, keeping debt affordable for future generations of British Columbians. Additional information on the debt outlook is found starting on page 47 and in the topic box on page 55.

The government revenue forecast is based on income growth, demand, commodity prices, the exchange rate and other related assumptions included in the economic forecast. Revenue also includes forecasts submitted by Crown corporations and organizations in the SUCH sector.

By comparison to the Budget 2004 plan, revenues (before revenue measures) are forecast to have increased by $2.2 billion in 2004/05 and 2005/06, reflecting stronger overall economic activity, higher energy prices, and increased federal contributions. In 2006/07, this increase falls to $1.8 billion reflecting the end of interim federal equalization allocations, combined with declines in other revenue sources such as property transfer taxes, Crown corporation net incomes, and forestry revenues. After deducting the impact of revenue measures – the change in revenues becomes $2.1 billion in 2004/05, $1.7 billion in 2005/06 and $1.3 billion in 2006/07 (as shown in Table 1.2).

The revenue forecast is described starting on page 34. The revenue forecast also includes the effect of revenue measures totaling $484 million in 2005/06 and $496 million in 2006/07. These revenue policy changes are detailed in Part 2: Revenue Measures.

The higher levels of government revenues have provided the basis for expanded service levels, lower taxes and lower direct government operating debt, while maintaining a balanced budget plan for 2005/06 to 2007/08. The available revenues have been allocated amongst:

• new spending commitments for health care, education, and priority initiatives for children, communities, safety, economic development, culture and the environment;
• tax reductions benefiting all British Columbians including those at lower income levels, and ensuring businesses remain competitive; and
• the surplus and forecast allowance, which if unspent, will help to reduce direct operating debt.

Table 1.3 summarizes the allocation of available revenues to increased services, to revenue measures, and to the surplus and forecast allowance, which go towards debt reduction.

Budget 2005 includes a capital plan for ministries and taxpayer-supported agencies that is substantially higher than last year's plan, and funds an additional $1 billion in 2005/06 and $881 million in 2006/07. This reflects increased capital spending to address government priorities in the K–12, post-secondary and health sectors along with transportation projects. More information on the capital spending forecast is found on page 42.

The fiscal plan is based on the Ministry of Finance's economic forecast that projects economic growth of 3.1 per cent for 2005 and 3.0 per cent in 2006 and 2007, slightly less than the independent Economic Forecast Council average. Full details of the economic forecast are found in Part 3: British Columbia Economic Review and Outlook.

The spending plan reflects the allocation of available financial resources to meet government priorities, subsequent to the annual review of ministry spending plans. Overall spending is forecast to increase by 4.7 per cent between 2004/05 and 2005/06, as funding is increased in most ministry budgets. Further information on the spending forecast, including the CRF spending plan, follows this introduction.

The very large and unpredicted revenue increase in 2004/05 provides a near-record surplus for that year, one that is not expected to extend into the future since revenue growth rates slow sharply after the rapid increase of 2004/05. Government plans to allocate $452 million from the 2004/05 surplus to one-time or accelerated spending initiatives, matching the one-time nature of some of the 2004/05 revenues. $550 million is transferred to the BC Transportation Financing Authority (BCTFA). Adding this to the $200 million of cash proceeds from the BC Rail Investment Partnership, BCTFA receives a total of $750 million enabling it to pay down some of its debt. Supplementary Estimates will be introduced in the Legislature to authorize the one-time initiatives and the $550 million transfer to the BCTFA.

Further information on Supplementary Estimates, the updated 2004/05 forecast, and changes since the February 17, 2004 budget are provided in Table 1.6 and in Part 4: 2004/05 Updated Financial Forecast (third Quarterly Report).

The main risks to the government fiscal plan include economic fluctuations such as exchange rate or sudden commodity price changes, and potential changes to federal transfer allocations on the revenue side, as well as wage and service demand pressures on the expenditure side. These and other risks are more fully described starting on page 49.

A $300 million forecast allowance is retained in 2004/05 to protect the bottom line against unanticipated revenue shortfalls or spending pressures that may arise before the end of the fiscal year. The fiscal plan also includes forecast allowances of $400 million in 2005/06, $450 million in 2006/07, and $550 million in 2007/08 to protect the fiscal plan from revenue risks such as sudden changes in energy prices and from spending pressures such as forest fires or future public sector wage settlements.

The three-year fiscal plan conforms to the standards set by the accounting profession for senior governments in Canada referred to as generally accepted accounting principles or "GAAP". As with Budget 2004, this budget integrates financial forecasts for schools, universities, colleges and health authorities/societies (the SUCH sector) into government's revenue, spending and balance sheet projections.

Consolidated Revenue Fund Spending

Consolidated Revenue Fund (CRF) spending will increase from an initial estimate of $25.1 billion in 2004/05 to $27.5 billion by 2007/08 – a 9.7 per cent increase.

This budget builds on Budget 2004's commitment to healthcare and education as government's main funding priority areas, while taking advantage of the new choices provided by increased revenues to enhance commitments to provide additional support to BC's communities, children, increased safety, economic development and protection of the environment.

Health Care

Budget 2005 invests growing provincial revenues in British Columbia's funding priorities of health care and education. Over the next three years health care will receive the largest share of funding increases.

By 2007/08, the Health Services budget will increase by over 14.7 per cent or $1.5 billion since Budget 2004 was delivered on February 17, 2004. This is a result of additional new provincial funding and government's continued commitment to reinvest every new federal dollar from the First Ministers' Accord on Health Care Renewal funding and the new federal health funding agreement.

In 2004/05, Supplementary Estimates provided for new federal health care funding supplemental to the 2003 Health Accord and to introduce the new Public Health and Immunization Trust. These new funds have been built into Budget 2005 and will support home care and palliative care, critical care services, health human resources, enhanced public health capacity and new childhood and adolescent vaccination programs such as influenza, chicken pox and meningococcal.

In September 2004, the provinces, territories and federal government agreed to a 10-year plan to strengthen health care at the First Ministers meeting held in Ottawa. British Columbia's share of new federal funding is expected to be $5.4 billion over the next ten years. The First Ministers also agreed that the top priority for these funds is to improve access to care and reduce wait times where they are longer than medically acceptable.

Although each province will be expected to identify its own spending priorities across the continuum of health services provided to its citizens, First Ministers agreed that cancer treatment, heart surgeries, diagnostic imaging, joint replacement and sight restoration services are important priority areas to be considered (for additional information on health care spending see the topic box on the First Ministers' Agreement on Health Care on page 63).

While the federal government has not yet passed legislation for the new ten year health care funding, Budget 2005 includes the new funding due to the advanced state of the federal commitment. Budget 2005 maintains the provincial promise to reinvest every new federal health dollar in additional health care services. When added to Budget 2004 and Budget 2005's significant provincially funded increases this results in an annual increase in health care spending of over $1.5 billion from 2004/05 (Budget 2004) to 2007/08.

The $1.5 billion increase from 2004/05 to 2007/08 has been allocated to the following major program areas:

Regional Health Sector ($1,044 million) for services such as:

• Effective health promotion, disease prevention and other public health services;
• Enhancing primary care;
• Cancer treatment, heart surgeries, diagnostic imaging, joint replacement, sight restoration services, renal care and palliative care;
• Delivering effective community and home-based services;
• Increased options for frail seniors in the assisted living and residential care sector;
• Increasing the supply and training of health care professionals; and
• Patient safety initiatives.

Medical Services Plan ($120 million):

• To provide for increased volume related to population growth and aging.

Pharmacare ($254 million):

• For new drugs and anticipated volume and price increases for prescription drugs.

Debt Service and Amortization ($64 million):

• To support new provincial capital investment of $735 million over three years in the health sector.

Emergency Health Services (BC Ambulance) ($47 million):

• Additional capacity for emergency transport services.

Examples of spending initiatives that will increase access and services for the public, include:

• $10 million over three years for screening mammography;
• $14 million over three years for children and youth with special needs to provide additional diagnosis and assessments services for children who have developmental behavioural conditions including fetal alcohol syndrome disorder;
• $70 million is the Ministry of Health Services portion of the $76 million for Early Childhood Screening initiatives targeted at children below the age of six. Funding is provided for dental screening and services, hearing screening (A Sound Start), and vision screening;
• $77 million over 3 years for recruitment, training and retention of nurses;
• $100 million over three years for public health initiatives including ActNow BC, which promotes healthy lifestyles including physical activity, healthy eating, living tobacco free and healthy choices during pregnancy; and expanding public health capacity including prevention activities such as immunization programs, drinking water and food safety, and health emergency preparedness;
• $100 million budgeted in 2007/08 for the Michael Smith Foundation For Health Research for health system research including strategies to attract and keep health researchers and trainees in BC and to leverage research funding from other sources; and
• $125 million over three years for life supporting drugs and services for cancer, cardiac, renal and transplant patients.

Education: K–12

Budget 2005 builds on government's ongoing commitment to education. Annual funding for K–12 will increase $253 million by 2007/08 compared to 2004/05 funding in Budget 2004. This represents 5.1 per cent growth in annual funding by 2007/08.

Per pupil funding for 2005/06 is estimated at $7,079 per student, a 4.8 per cent increase over 2004/05. This represents a $150 million increase in funding for the 2005/06 school year. Per pupil funding continues to grow to support student achievement despite declining enrolment projections.

This increased funding for K–12 students will be linked to locally developed plans that will ensure every student has access to:

• school libraries and quality learning resources;
• music and arts programs; and
• improved services to support every special needs student.

Further information on funding and services for children and youth with special needs can be found in the topic box on page 66.

In addition to increased per pupil funding, Budget 2005 provides funding for a $1.5 billion seismic mitigation program to upgrade all at-risk schools within 15 years. A long-term plan for the program will be established with school boards and the Ministry of Education.

Post-Secondary Education

Budget 2005 builds on government's ongoing commitment to increasing access to post-secondary education. Annual funding for post-secondary education will increase $196 million by 2007/08 compared to 2004/05 funding in Budget 2004. This represents 10.3 per cent growth in annual funding by 2007/08.

In partnership with the post-secondary sector, 25,000 new student spaces will be created by 2010. This represents average seat growth of 2.6 per cent annually. By the end of 2007/08, there will be 16,205 new seats in the post-secondary system. Through Budget 2005, the province will fully fund its share of annual costs for these new spaces at an average of $9,200 per space.

In addition to fully funding its share of annual costs for seat growth, the province is also providing almost $800 million in capital funding for infrastructure to accommodate seat growth, replace existing infrastructure and facilitate research activities throughout the post-secondary system.

The province provides over $300 million annually in funding for loans to post-secondary students. As part of a comprehensive student financial assistance system, Budget 2005 also provides over $450 million over three years in funding for loan reductions targeting funds towards students who are most in need, grants for students with disabilities, debt relief programs and a loan-forgiveness program that encourages doctors, nurses and other health professionals to practice in under-served regions.

Children

Budget 2005 invests growing provincial revenues to develop the capacity of families and communities to care for and protect vulnerable children and youth. Government will spend an additional $241 million by 2007/08 to enhance programs and services for children and their families.

Through various service transformation initiatives focussed on keeping children in their families safely, the number of children in care has been reduced by over 13 per cent (1,000) since April 2002. While these transformation initiatives, including providing support for out-of-care options, continue to produce good results, challenges remain to reduce the number of aboriginal children in care. An additional $26 million has been provided to continue to support prevention and out-of-care options to keep children safe within their families and communities.

An additional $5 million has been provided to cover the cost of making more families eligible for child care subsidies. Potential new federal funding for enhancing early learning and child care has not been included in Budget 2005 due to the preliminary and tentative nature of the funding arrangement. Once the federal government confirms the new funding and details of the new agreement are known, a Supplementary Estimate will be presented to the Legislature to commit the new funding to child care. For additional information on anticipated new federal funding for early learning and child care, see the topic box on page 65.

Budget 2005 also provides $76 million over three years to implement an integrated strategy for infant and early childhood screening programs as one method for improving early childhood development. Programs will focus on newborn hearing screening (A Sound Start), dental screening for infants and preschoolers, and a population health-based case finding approach to identify preschool children with vision impairments. This strategy will involve service providers in the health, school and community social services sectors.

Budget 2005 provides an additional $134 million over the next three years to enhance programs and services for children and youth with special needs and their families, including $14 million for enhanced diagnostic and assessment services for children who have developmental behavioral conditions (including Fetal Alcohol Syndrome Disorder (FASD)), $42 million to provide new intervention and support services for children affected by FASD for reducing waitlists in direct intervention services and key family support services, and $78 million for enhanced services to children and youth with special needs in the education system. For additional information on children and youth with special needs, see the topic box on page 66.

Communities

Budget 2005 invests growing provincial revenues in services and programs that support BC's communities. Communities benefit from the additional funding that Budget 2005 provides to persons with disabilities, people who are homeless, and recent immigrants to increase their self-reliance and maximize involvement in their local communities, as well as from the expansion of local arts, literacy and cultural initiatives.

Budget 2005 invests in services that assist individuals and families in need. The Ministry of Human Resources budget includes an additional $113 million by 2007/08 to provide for changes to the caseload composition, a $70 monthly rate increase in support to persons with disabilities, and additional funding of $5 million annually for providing emergency shelter to people who are homeless.

Budget 2005 includes $78 million over the next three years to fund increased costs due to growth and changes in the composition of the income assistance caseload.

For the past three years, the Ministry of Human Resources has been focusing on programs and services designed to assist persons with disabilities to enhance their self-reliance. Effective December 22, 2004, income assistance rates for persons with disabilities were increased by $70 per month or 9 per cent for a single person with disabilities. This is the second highest support rate for persons with disabilities in Canada. Budget 2005 provides $194 million to fund the cost of the rate increase.

Income assistance rates for persons with disabilities were last increased in August 2000, when a general increase of 2 per cent was provided. Since the time of this rate increase, the cost of living has increased 7.4 per cent. For a single person with disabilities, the $70 per month increase is the largest support rate increase in the past 30 years and the largest percentage increase since 1981.

The number of adults with developmental disabilities accessing residential and day support services and their acuity of need are increasing as a result of demographic trends and advancing technologies. An additional $91 million has been provided in the Ministry of Children and Family Development over the next three years to manage this expected caseload growth.

Homelessness

Budget 2005 provides an additional $48 million by 2007/08 for emergency shelter programs, housing and support services for people who are homeless.

The Ministry of Human Resources will provide an additional $19 million through community organizations to provide year-round emergency shelter beds, food and other services in BC communities for people with basic safety, comfort, nutrition and hygiene needs. An additional $29 million is also being provided through other ministries for transition and supportive housing projects that focus on moving people into stable housing arrangements – the Ministry of Community, Aboriginal and Women's Services will subsidize, through BC Housing Management Commission (BCHMC), the development of the projects while related health and other support services will be provided by health authorities and the ministries of Human Resources and Children and Family Development. For additional information on government's commitment to address homelessness, see the topic box on page 68.

Budget 2005 includes $31 million in funding for BCHMC to provide operating subsidies for independent living spaces provided through Independent Living BC. BCHMC will also receive an additional $5 million, which will leverage additional funding from federal programs to upgrade public housing.

The Ministry of Attorney General has piloted several successful family law initiatives designed to balance the needs of citizens with the capacity of the legal system. Budget 2005 provides an additional $15 million to ensure these programs continue for the next three years. The funding enhances current services where domestic violence is involved; the Family Duty Counsel programs (Provincial and Supreme Court) that assist self-represented litigants in family matters; and, the Supreme Court Family referral program that assists unrepresented parties who must access the Supreme Court in complex matters to resolve a family justice matter.

Budget 2005 provides for 100 per cent of net traffic fine revenue to be returned to municipalities beginning in 2004/05. Seventy municipalities will receive more money for community policing, crime prevention and other initiatives to help make communities safer.

Public libraries will benefit from $12 million in new funding, bringing broadband Internet access to every branch, operating a 24-hour virtual reference desk and setting up a one-card system to give the public access to books from any library in the province.

Budget 2005 provides $25 million in one-time funding to establish an Arts and Culture Endowment and Development Fund. The fund will leverage private sector support to build endowments for arts and culture organizations and assist with development and sustainability initiatives. The BC Arts Council will also receive an additional $3 million in annual funding.

The province is committing $5 million annually beginning in 2005/06 to assist skilled immigrants to obtain accreditation and employment that better matches their training, skills and experience.

Safety

Budget 2005 invests growing provincial revenues to help prevent violence against women, and to protect communities from crime.

Budget 2005 invests significant funding over the next three years to help keep communities safe. This investment includes $93 million in policing to provide 215 new RCMP positions to be allocated to detachment policing, first nations policing, major and serious crime investigations, cyber crime, an Indo-Canadian task force, and other policing initiatives.

This increased level of policing is anticipated to create additional demands on the legal system; this will be addressed by adding $25 million to the Ministry of Attorney General for the processing of new cases and $4 million to the Ministry of Public Safety and Solicitor General for the related pressures in the correction system. Funding will provide additional capacity in the system by adding prosecutors, sheriffs, and corrections related costs over the next three years.

The Corrections Branch houses persons sentenced or remanded into custody until trial. Additional funding of $32 million over three years has been allocated to address trends in inmate population and to enhance safety in both the community corrections programs and the province's correctional facilities. $7 million over three years has been allocated to the Ministry of Attorney General to accommodate the impact of additional police hiring on the justice system.

Budget 2005 provides an additional $37 million to increase personal safety for women and girls through increased funding for transition house services, outreach programs, support services for traumatized children, additional counseling and initiatives to prevent violence.

Economic Development

Budget 2005 includes significant initiatives targeting economic development throughout the province.

Agriculture and Aquaculture Initiatives

Budget 2005 provides $49 million for initiatives aimed at enhancing the province's agricultural and aquaculture industries, and protecting food safety:

• $27 million for assistance to producers as well as enhanced surveillance and testing, as part of the provincial response to BSE and avian flu;
• $6 million for fisheries initiatives including inspection, monitoring and improvements in aquatic animal health; and
• $16 million for other initiatives including crop insurance funding, research, innovation and increasing the competitiveness of the BC food industry.

Forestry

Budget 2005 includes $266 million in funding for initiatives to address the economic impacts of the mountain pine beetle epidemic and forest fires, while providing new opportunities to industry and communities.

• $16 million for incremental manufacturing and economic diversification planning in communities impacted by the mountain pine beetle epidemic.
• $85 million for a major reforestation program targeting areas of the province impacted by the mountain pine beetle epidemic and forest fires.

• $50 million for the province's commitment to increase the Forestry Revitalization Trust to $125 million, to help workers and contractors pursue new opportunities and participate in building a more competitive forest industry.
• $50 million toward compensation for improvements by companies impacted by timber re-allocation as part of the Forestry Revitalization Plan, increasing the total compensation for companies to $250 million. The reallocation of 20 per cent of the long-term replaceable logging rights held by major licensees is expected to be complete by March 2006.
• $51 million for fuel management and the commitment to fully implement the recommendations of the Filmon Report. This includes the addition of two air tankers, hiring seven additional unit crews and funding for Community Wildfire Protection Plans.
• $14 million to replace bridges providing access to remote communities, including the Kikomun Bridge near Elko, on the Caven Creek forest service road.

Oil and Gas, Mining

Budget 2005 provides $110 million for initiatives to facilitate exploration and continued development of the provincial oil and gas and mining sectors.

• $50 million investment in the heartlands oil and gas road rehabilitation strategy, to upgrade roads and lengthen the winter drilling season. This investment will be funded through the transportation investment plan.
• $18 million to implement the mining plan, including measures to improve mine safety and safety of workers and improved services to the mining sector.
• $25 million for a new geoscience centre to, in partnership with industry, develop and publish geoscience data and enhance exploration in the mining and oil and gas sectors.
• $17 million for additional oil and gas initiatives, including community and stakeholder engagement.

Infrastructure

Budget 2005 provides $207 million in new funding for municipal and regional infrastructure across the province:

• $97 million for municipal infrastructure projects through enhancement of programs in the Ministry of Community, Aboriginal and Women's Services, including the new BC Community Water Improvement Program targeting projects to improve drinking water and waste management; and the Community Development Initiative in the Ministry of Small Business and Economic Development.
• $50 million for major regional sports facilities funded through the Ministry of Small Business and Economic Development.
• $60 million for major post-secondary sports training facilities funded through the Ministry of Small Business and Economic Development.

Combined with the $206 million of provincial funding to be provided through existing infrastructure programs from 2004/05 to 2007/08, provincial funding for municipal and regional infrastructure in Budget 2005 will total $413 million. This provincial funding will in turn leverage significant additional investments in municipal and regional infrastructure from other levels of government and the private sector.

Tourism

Budget 2005 provides $67 million over the three years for Tourism BC, building toward the objective of doubling the tourism industry by 2015. This funding, combined with revenues allocated from the provincial hotel room tax, will allow Tourism BC to double its marketing budget to $50 million. An additional $14 million is allocated in 2004/05 for tourism initiatives to be announced at a later date.

Peace River Regional District Memorandum of Understanding

Budget 2005 provides $24 million in new funding for a potential new memorandum of understanding (MOU) with the Peace River Regional District (PRRD). The province has budgeted $20 million annually from 2005/06 to 2007/08 for grants to the PRRD under the MOU, an increase of $8 million per year. The province has also budgeted for a one-time $40 million grant in 2004/05 to address historical infrastructure requirements in North East BC.

In addition to the initiatives shown in Table 1.11, government's fiscal plan includes a further $150 million set aside for future economic development initiatives. Further details will be provided as soon as plans are sufficiently advanced.

2010 Olympic and Paralympic Winter Games (2010 Olympics)

The province has committed $600 million toward the 2010 Olympics. This includes funding for venues, an endowment to support the ongoing operation of certain venues, medical and security costs, legacies for sports, First Nations and municipalities, and a contingency allocation of $140 million to protect against unbudgeted costs.

As a prudent planning assumption the province has allocated $40 million of the Olympic contingency to the government contingencies vote in 2007/08, for unforeseen expenditures associated with the Olympic funding envelope. Treasury Board maintains control over access to the Olympic contingency funding.

Through Budget 2005 the province will have funded $328 million of its $600 million commitment to the 2010 Olympics by 2007/08.

Further details on the provincial commitment to the 2010 Olympics can be found in the British Columbia Olympic and Paralympic Winter Games Secretariat Progress Report at:

www.sbed.gov.bc.ca/2010secretariat

Vancouver Convention Centre Expansion Project (VCCEP)

The VCCEP consists of an expansion to the existing Vancouver Convention and Exhibition Centre, as well as an upgrade and linkage to the existing facility. Total funding by the province to VCCEP will total $313 million by 2007/08:

• $230 million to fully fund the province's commitment to the project, including $7.5 million subject to matching funds from the federal government.
• $83 million of Tourism Vancouver's $90 million funding commitment. The province is contributing these funds to the project, and will be reimbursed through Tourism Vancouver's own source revenues over time.

Further information on the VCCEP can be found on the VCCEP Ltd. website at:

www.vccep.bc.ca

Transportation Investment Plan

Budget 2005 updates and builds on the three-year transportation investment plan. The plan continues to be based on the following principles:

• the province will dedicate revenue or funding sources to finance its contributions;
• federal cost-sharing will be secured on all eligible projects and programs;
• additional transportation investment will be leveraged through partnerships with private partners; and
• provincial spending on new transportation investments will not increase the taxpayer-supported debt of the BC Transportation Financing Authority (BCTFA) above $3.4 billion.

The updated transportation plan provides:

• $2 billion of provincial investment in transportation infrastructure between 2005/06 and 2007/08; and
• $1.3 billion of investment leveraged through federal cost-sharing and partnerships with private partners, local governments and other agencies.

The province plans to commit $550 million of new funding to the transportation investment plan in 2004/05 through a Supplementary Estimate. This funding will flow to the BCTFA, offsetting $550 million of debt requirements to help ensure the BCTFA stays within its debt cap of $3.4 billion through 2007/08. Further details on the transportation investment plan can be found in the topic box on page 58.

Environment

Budget 2005 provides $150 million for initiatives aimed at environmental protection and land use certainty to facilitate sustainable economic development as follows:

• $16 million to increase the number of park rangers and conservation officers, as well as to provide seasonal employment opportunities for youth and training for potential future employment opportunities in the field of environmental management through the BC Conservation Corps.
• $91 million for the investigation and remediation of contaminated sites on Crown land.
• $8 million to implement the Drinking Water Protection Act, including research into the protection of surface and ground water and contaminated sites.
• $5 million to increase the capacity of the Environmental Assessment Office to address environmental assessments throughout the province.
• $30 million for cross-government land use planning activities including completion and implementation of Land and Resource Management Plans. This will result in increased certainty for communities, First Nations and industry by confirming environmental, economic and cultural objectives on provincial lands.

Public Sector Compensation

The current compensation mandate that has been in place since January 2002 will remain unchanged until March 31, 2006. Approximately 70 per cent of all public sector employees (measured in full time equivalent terms) covering 68 agreements have agreements in place under the current 0-0-0 mandate.

The current compensation mandate provides net-zero' compensation increases. Accordingly, employers and their unions are free to negotiate changes in wages or benefits as long as the total compensation of the bargaining unit remains the same. The mandate also allows employers to address demonstrable skills shortages with targeted labour market adjustment increases, however the government has not provided incremental funding to employers for these increases.

The current mandate recognizes that BC public sector wages and benefits continue to be among the highest in the country. This mandate is both realistic and reflective of labour market conditions and consistent with the province's desire to ensure BC retains the workers and professionals needed to deliver quality health care and other services.

The Minister of Finance, as Chair of the Public Sector Employers' Council, is working with public sector employers to create a new bargaining mandate that will succeed the current mandate and will be effective April 1, 2006. That mandate will continue to balance a number of priorities including the need to recruit and retain employees while allowing flexibility to innovate and improve services to British Columbians. Any compensation increase must be sustainable and affordable for taxpayers over the long-term. As the next mandate is still under development, no compensation increase has been assumed in this fiscal plan.

With an annual compensation bill of about $16 billion including commercial Crown corporations, an annual 1 per cent increase in each of 2006/07 and 2007/08 and covering the entire public sector would increase costs by $160 million in 2006/07, and $320 million in 2007/08.

Taxpayer-supported Crown Corporation and Agency Expenses

Taxpayer-supported Crown corporations and agencies provide a number of services to the public. These agencies are primarily funded by the provincial government, but may also have outside sources of revenue. Some of the services provided by taxpayer-supported Crowns are highway construction (BC Transportation Financing Authority), property management (BC Buildings), property assessment, (B.C. Assessment Authority), social housing (BC Housing Management Commission), transit services (BC Transit), and legal services (Legal Services Society). Revenue and spending of taxpayer-supported Crown corporations are combined with CRF revenue and expenses in Tables 1.4 and 1.5. Revenues and expenses for individual taxpayer-supported Crown corporations are provided in Appendix Table A9.

Projected spending by taxpayer-supported Crown corporations for 2005/06 is $149 million higher than in the Budget 2004 fiscal plan. The increase primarily reflects an $82 million grant by the BC Transportation Financing Authority (BCTFA) to the RAV project, additional spending by the BC Housing Management Commission on the maintenance of its housing units, the increased budget for Tourism BC, and the impact of including the Industry Training Authority in the fiscal plan.

The increased spending will be partially offset by a reduction in BCTFA's debt service costs (mainly due to lower debt as a result of the cash transfers in 2004/05) and the capitalization of certain costs that were previously anticipated to be expensed or financed by private sector parties. As well, Columbia Basin Trust's power project costs were reclassified with Columbia Power Corporation as a commercial enterprise.

SUCH Sector Expenses

The SUCH sector is comprised of the school districts; universities; colleges, university colleges, and institutes; and the health authorities and hospital societies. The government funds these organizations that in turn deliver education and health care services to British Columbians on the government's behalf.

For some of these organizations, such as the school districts and health authorities, government transfers and fees cover most of their operating costs. For other organizations, such as universities and colleges, their operating costs are only partially funded by government, with the remaining revenues raised from outside sources. Revenue and spending of the SUCH Sector entities are combined with CRF revenue and expenses in Tables 1.4 and 1.5. However, revenues and expenses for individual SUCH entities are detailed in Appendix Table A9.

SUCH sector expenses in excess of government transfers are forecast to be $2.8 billion in 2005/06. This amount is offset by the SUCH sector's own source revenue in determining the bottom line impact of the SUCH sector.

• Projected spending by school districts for 2005/06 is $206 million higher than the Budget 2004 fiscal plan. The increase is primarily due to salaries for increased support levels to special needs students, costs associated with school generated funds and facilities maintenance. The increased spending will be partially offset by additional provincial contributions, school generated funds and other miscellaneous revenue.
• Projected spending by universities and colleges for 2005/06 is $258 million higher than the Budget 2004 fiscal plan. Government's planned seat expansion will result in additional operating costs and higher amortization expense due to increased capital expenditures. Government has fully funded its share of these costs by providing an average of $9,200 per seat to these organizations.
• Projected spending by health authorities and hospital societies for 2005/06 is $399 million higher than the Budget 2004 fiscal plan. The increase is primarily due to an increase in operating costs reflecting the increased provincial contributions and new federal health care funding.

Regional Authority Expenses

The Ministry of Children and Family Development continues the transition to establishing new governance authorities for adult community living services and child and family development services. Community Living BC is expected to assume full control over services to adults and children with developmental disabilities in the summer of 2005. The establishment of regional aboriginal authorities will occur in 2006/07, followed by regional authorities for non-aboriginal child and family services in 2007/08. The authorities will be considered established when they assume responsibility under legislation for the delivery of some or all services.

Revenue

Government revenue includes the combined revenues of the CRF, taxpayer-supported Crown corporations, the SUCH sector, and the net income of commercial Crown corporations. Following rapid growth of 11.9 per cent in 2004/05, revenue is forecast to total $33,076 million in 2005/06, up 1.1 per cent from the updated forecast for 2004/05 (see Table 1.4).

The 2005/06 forecast includes the effects of 4.7 per cent nominal GDP growth in 2005 and higher revenues from energy, coal and federal transfer payments. These improvements are partially offset by lower forest revenues and the effect of revenue measures announced since Budget 2004. In the next two years, revenue is forecast to grow 1.8 per cent per year on average as the economy posts an average 4.5 per cent annual nominal GDP growth.

The forecast includes BC's share of the additional federal health funding announced at the September, 2004 First Ministers' Meeting and the new equalization framework for 2004/05 and 2005/06 as of October 2004. The effect of these initiatives is that total contributions from the federal government grow 43.0 per cent and 6.1 per cent in 2004/05 and 2005/06 respectively, followed by a 4.8 per cent decline in 2006/07 and a 3.7 per cent increase in 2007/08.

Key assumptions and sensitivities relating to revenue are provided in Appendix Table A10.

Taxation Revenue

In 2005/06, revenue from taxation sources is forecast to decline $49 million annually mainly due to reduced revenues from corporate income and property transfer taxes, and the full year impact of tax measures that reduce revenue by $307 million over 2004/05. Over the next two years, revenue is forecast to increase an average 4.1 per cent annually reflecting expected growth in incomes and consumer spending.

• Personal income tax – increasing $147 million in 2005/06 over 2004/05, incorporating a tax reduction for low and moderate income taxpayers. In addition, 2004/05 revenue includes a one-time $69 million prior-year adjustment reflecting higher final information for the 2003 tax year than anticipated when the 2003/04 books were closed. Revenue averages 5.8 per cent annual growth over the next two years based on the Ministry of Finance personal and labour income forecast.
• Corporate income tax – decreasing $181 million in 2005/06 mainly due to a one-time $168 million payment for the 2003 tax year in 2004/05 as well as Budget 2005 tax measures that reduce revenue by $40 million in 2005/06. See Part 2 for more details regarding the competitiveness measures introduced in Budget 2005.
• Social service tax – increasing 1.2 per cent in 2005/06 reflecting growth in all major categories of expenditure, partially offset by the full-year impact of the reduction in the sales tax rate from 7.5 per cent to 7.0 per cent, effective October 21, 2004. Growth in sales tax revenue is expected to average 5.0 per cent over the next two years, in line with the economic forecast for taxable expenditures.
• Property transfer tax – decreasing 23.3 per cent in 2005/06, reflecting an anticipated moderation in housing market activity from the rapid pace recorded in 2004/05. In addition, government has increased the threshold for first-time homebuyers, which reduces revenue by $15 million in 2005/06. The forecast assumes a further 10.9 per cent decline in 2006/07 before increasing 2.4 per cent in 2007/08.

Natural Resource Revenue

• Energy and minerals – increasing $264 million in 2005/06 over 2004/05 reflecting assumed higher natural gas prices and bonus bid sales, and increased revenue from coal production. Natural gas prices are forecast to increase from C$5.52/gigajoule in 2004/05 to C$5.71 and C$5.75 in 2005/06 and 2006/07 before moderating slightly to C$5.28 in 2007/08. Contract coal prices are forecast to increase from US$51/tonne in 2004 to US$120/tonne in 2005, before moderating to US$100/tonne by 2007. Revenue increases $94 million in 2006/07 as slightly higher natural gas prices and increased production volumes lead to higher revenue from natural gas royalties and bonus bid sales, partly offset by reduced revenues from minerals and electricity sales under the Columbia River Treaty. In 2007/08, revenue declines $136 million as coal and energy-related commodity prices are expected to moderate. See the topic box on page 60 for more information.
• Forests – decreasing $225 million in 2005/06 from 2004/05 reflecting lower harvest volumes partly due to reduced lumber prices, a higher Canada/US exchange rate and lower US demand. Revenue is relatively flat over the next two years as prices are expected to remain stable and an increasing proportion of BC Timber Sales harvesting offsets overall declining volumes. The forecast assumes there is no resolution to the softwood lumber dispute.

Other Revenue

This category includes revenues from Medical Services Plan premiums, fees, licences, investment earnings, sales of goods and services, fines and other miscellaneous sources. This includes revenue collected by ministries and treated as offsets to CRF spending, as well as revenue earned from outside the government entity by taxpayer-supported Crown corporations and agencies and the SUCH sector.

• Medical Service Plan premiums – decreasing $31 million in 2005/06 mainly reflecting the part-year effect of the Budget 2005 revenue measure to enhance premium assistance for BC residents. Revenue declines a further $5 million in 2006/07 due to the full year impact of this measure before rising in 2007/08.
• Post-secondary fees – projected revenue growth of 11.5% in 2005/06 based on forecasts submitted by the universities and colleges. This includes their assumptions for tuition fee increases and student seat growth.
• Investment earnings – forecast to average 4.9 per cent growth over the three years reflecting expected rising interest rates and increased borrowing by Crown corporations through the fiscal agency loan program.
• Miscellaneous – forecast to average 2.1 per cent annual growth over the three years reflecting higher recoveries from ministries, and the SUCH sector.

Contributions from the Federal Government

Federal government payments received under health and social transfer and equalization programs are the major sources of transfer payments. Other sources include payments from the federal government for health, education, social, transportation and other cost-shared programs. This includes federal transfers to ministries that are treated as offsets to spending and payments received by taxpayer-supported Crown corporations and agencies and the SUCH sector.

• Federal government health and social transfers – The 2005 plan incorporates the additional federal funding for health from the agreement reached at the September 2004 First Ministers' Meeting. The updated plan assumes that all cash received in 2004/05 from the federal government as a result of this agreement will be deferred to future years to match the increased expenditures. As a result, revenue increases 20.5 per cent in 2005/06 and grows a further 8.8 per cent and 6.5 per cent in the next two years reflecting increased federal government funding.
• Equalization – In 2005/06, equalization revenue is $590 million, as defined by the new framework established at the October 2004 First Ministers' Meeting. In 2006/07 and 2007/08, equalization revenue is forecast to be zero as the basis for provincial entitlements has not been determined for those years. See the topic box in the second Quarterly Report - 2004/05 for further details.

Compared to the Budget 2004 plan, overall taxpayer-supported revenue is forecast to be $1,705 million higher in 2004/05, up $1,622 million in 2005/06 and $1,194 million higher in 2006/07. The main areas of change are:

• Personal income tax – up $50 million in 2004/05 mainly due to higher-than-expected tax assessments for the 2003 tax year, partly offset by $30 million of tax measures introduced in Budget 2005. Revenue is down $100 million and $97 million in 2005/06 and 2006/07, mainly due to the policy change to reduce taxes for low and moderate income taxpayers.
• Corporate income tax – up $363 million in 2004/05 reflecting higher instalment payments from the federal government due to an improved 2004 national corporate profits outlook and a $217-million gain due to higher final 2003 tax assessments. Revenue is up $299 million and $121 million over the next two years due to the effects of higher national and BC corporate tax bases. These improvements are partly offset by BC Budget 2005 tax measures in addition to the federal government's measures in its 2004/05 budget.
• Social service tax – down $90 million in 2004/05 reflecting lower collections due to the reduced sales tax rate, partly offset by higher-than-expected growth in taxable expenditures. In 2005/06 and 2006/07, revenue is down $240 million and $227 million from Budget 2004 mainly due to the full-year impacts of the sales tax reduction.
• Property transfer tax – up $168 million in 2004/05 due to the very strong housing market over the past year. The forecast assumes that house sales will not continue at the same pace and revenue returns to trend levels resulting in lower variances from Budget 2004 of $60 million and $10 million in 2005/06 and 2006/07. In addition, the forecast incorporates the effect of increasing the threshold for first-time homebuyers.
• Other taxes – up $65 million, $53 million and $58 million over the three years mainly due to higher corporation capital, insurance premium and tobacco taxes reflecting improved collections in 2004/05.
• Energy and minerals – The overall revenue forecast from energy and mineral sources is up from the Budget 2004 plan mainly due to an improved outlook for natural gas, electricity and coal prices. Revenue has increased $223 million, $663 million and $818 million over the 2004/05 to 2006/07 period. See the topic box at the end of Part 1 and Table A10 for more details.
• Forests – up $306 million in 2004/05 reflecting higher lumber and pulp prices in 2004 and higher harvest volumes, due in part to stronger US demand. Revenue is expected to be up $68 million in 2005/06 and $33 million in 2006/07 due to assumed higher harvest volumes and an increased BC Timber Sales share of the overall harvest. The improvement is lower in the last two years as forest sector prices are expected to be little changed and the Canada-US exchange rate is forecast to be slightly higher than assumed in Budget 2004.
• Columbia Power Corporation and Columbia Basin Trust – down $57 million, $57 million and $70 million from Budget 2004 reflecting a reclassification of Columbia Power projects back to commercial Crown corporation status.
• Medical Services Plan premiums – up $60 million and $14 million in 2004/05 and 2005/06 compared to Budget 2004. The increase in 2004/05 reflects a change in the accounting treatment of premium revenue and allowance for doubtful accounts. Changes in 2005/06 and 2006/07 reflect higher commission costs and the Budget 2005 measure to enhance premium assistance.
• Post secondary education fees – up $66 million, $95 million and $98 million from Budget 2004 over the three years 2004/05 to 2006/07. The increases reflect forecasts submitted by the universities and colleges. This includes their assumptions for tuition fee increases and student seat growth.
• Other fees and licences – down $36 million in 2004/05, up $88 million in 2005/06 and up $25 million in 2006/07 mainly due to a revised plan of providing free Crown grants and nominal rent tenures to establish new parks, transfer provincial parks to local government, and other land transfers. This reflects a non-cash transaction that records the write-up of land from book value to market value as increased revenue, but has no impact on government's bottom line as there is an offsetting expense recorded in the budget of Ministry of Sustainable Resource Management.
• Equalization – up $578 million in 2004/05 and $170 million in 2005/06 reflecting the new framework established by the October, 2004 First Ministers' Meeting. In 2006/07, equalization revenue is forecast to be zero, down $422 million from Budget 2004 as the basis for the allocation has not been determined.
• Health and social transfers – up $66 million in 2004/05 mainly due to prior-year adjustments. The forecast assumes that additional cash to be received in 2004/05 due to increased funding from the September, 2004 First Ministers' Meeting will be deferred to future years and matched with increased expenses. Revenue is up $459 million in 2005/06 and $772 million in 2006/07 reflecting higher transfers as a result of the First Ministers' Meeting in September 2004. Component details are shown in Table A10.

Commercial Crown Corporation and Agency Net Impact

• British Columbia Hydro and Power Authority – At $395 million, the BC Hydro forecast income before regulatory transfers for 2005/06 is $53 million less than the forecast in the Budget 2004 fiscal plan.

• British Columbia Liquor Distribution Branch (LDB) – At $779 million, LDB's projected net income for 2005/06 is $14 million less than the forecast in the Budget 2004 fiscal plan. Product costs and discounts to licensee retail stores are increasing at a faster rate than sales, resulting in a lower rate of growth in gross margin. As well, increased operating costs reflect LDB's retail marketing plan, including credit card use and improvements to its retail outlets.
• British Columbia Lottery Corporation – BC Lotteries' total transfers to the government (after distribution to the federal government) are projected at $892 million for 2005/06, $50 million less than the Budget 2004 forecast. Lottery and bingo revenue projections have declined due to lower player participation in lottery games and a slower than projected introduction of community bingo gaming centres. This is partially offset by an increase in the casino gaming revenue forecast.

• British Columbia Railway Company – At $76 million, BC Rail's forecast earnings for government's 2005/06 fiscal year are $25 million higher than the Budget 2004 outlook. The increase reflects changes in assumptions for the timing of the disposal of Vancouver Wharves and the Port Subdivision.
• Insurance Corporation of British Columbia – ICBC's outlook for the government's 2005/06 fiscal year is projected at $176 million, a $179 million improvement over the outlook in Budget 2004. The improvement is primarily due to lower projected claims costs. Other improvements include lower operating costs and higher investment income. These gains are partially offset by a forecast reduction in premium revenue due to lower rate increase expectations.

Full-Time Equivalents (FTEs)

Taxpayer-supported FTEs, including ministries and special offices (CRF), taxpayer-supported Crown corporations and agencies and regional authorities, is projected at 31,220 in 2005/06. This represents an increase of 350 FTEs from the 2004/05 forecast and is 400 FTEs higher than the 2005/06 forecast in last year's fiscal plan.

By 2007/08, FTEs are projected to increase a further 255 to total 31,475 FTEs. Table 1.16 provides details of changes from last year's plan. FTEs of the SUCH sector are not included in these forecasts.

Ministries and special offices (CRF)

The 2005/06 FTEs projection for ministries and special offices is 27,150 FTEs – a net increase of 660 FTEs from last year's fiscal plan. The increase reflects priorities in a number of areas, such as additional support for ambulance services, child and youth mental health, the response to the mountain pine beetle and the Filmon Firestorm Report, additional policing and corrections support and oil and gas strategies.

Approximately 3,000 FTEs within the Ministry of Children and Family Development were to be transferred to new governance authorities by 2006/07. Community Living BC is expected to assume full control over services to adults and children with developmental disabilities in the summer of 2005. The establishment of regional aboriginal authorities will occur in 2006/07, followed by regional authorities for non-aboriginal child and family services in 2007/08. The authorities will be considered established when they assume responsibility under legislation for the delivery of some or all services. Further information is available in the ministry's service plan.

Taxpayer-supported Crown corporations and agencies

The 2005/06 taxpayer-supported Crown corporation and agency FTE projection is 3,925 – a decrease of 5 FTEs from last year's fiscal plan. The reduction is primarily due to the impact of moving the Organized Crime Agency of BC Society under the umbrella of the Combined Forces Special Enforcement Unit, partially offset by increased operational requirements of Tourism BC and the BC Assessment Authority.

Capital Spending¹

In addition to funding municipal and regional infrastructure delivered by local governments, the province also invests directly in capital infrastructure to provide services to the public and facilitate economic development. Provincial capital infrastructure investments are made through school districts, health authorities, post-secondary institutions, Crown agencies and ministries.

Taxpayer-supported capital spending

Taxpayer-supported capital spending includes capital infrastructure for school districts, health authorities, post-secondary institutions, taxpayer-supported Crown agencies, and ministries.

The capital spending numbers for health and education reflect the forecasts for health authorities, school districts and post-secondary institutions. Annual interest costs on capital related debt are also charged against government's surplus.

Taxpayer-supported capital spending is projected to range from $2.8 billion in 2005/06 to $2.1 billion in 2007/08. Significant elements of this projected spending include the following:

• A $1.5 billion program to seismically upgrade all at-risk schools in the province over fifteen years. This program will cover both structural and non-structural upgrading of school facilities. A long-term plan for the program will be established with school boards and the Ministry of Education.
• In addition to fully funding its share of annual costs for seat growth, the province is also providing almost $800 million in capital funding for infrastructure to accommodate seat growth, replace existing infrastructure and facilitate research activities throughout the post-secondary system. Examples of post-secondary projects included in projected capital spending are the University of Victoria Pacific Time Series Undersea Networked Experiment (NEPTUNE), the British Columbia Institute of Technology Sea Island expansion, the Selkirk College Castlegar Aviation Centre and the University College of the Cariboo Williams Lake replacement campus. Post-secondary institutions utilize own-source revenues in addition to provincial funding, to finance capital infrastructure.
• The Ministry of Health Services will also provide $735 million (including federal equipment funding) in capital grants to health authorities for new major construction and upgrading of existing health facilities, equipment, and clinical information systems over the next three years.

• Continued implementation of the transportation investment plan (see the topic box on page 58 for more information).
• The Vancouver Convention Centre Expansion Project (VCCEP). Capital spending for VCCEP on Table 1.17 is based on the total capital cost of the VCCEP, reflecting the funding provided by all partners; the province, Canada, and Tourism Vancouver. Table 1.18 shows the capital expenditures for the VCCEP associated with provincial financing only, which totals $230 million. Table 1.13 provides the timing and amount of provincial funding grants provided to the VCCEP. These grants are eliminated in the summary financial statements, so that only the total capital expenditures of the VCCEP are reported in the government financial statements.

Provincial capital infrastructure spending is financed through a combination of sources:

• cash balances;
• partnerships with the private sector (public-private-partnerships);
• cost-sharing with partners; and/or
• borrowing (debt-financing).

Debt-financing continues to represent a significant source of financing for provincial capital spending, so the level of capital spending has a significant impact on projected provincial debt.

Self-supported capital spending

Total capital spending includes capital infrastructure for self-supported commercial Crown corporations.

Self-supported capital spending is projected to range from $1.1 billion in 2005/06 to $1.3 billion in 2007/08. The majority of this capital spending is for electrical generation, transmission and distribution projects carried out through BC Hydro and BC Transmission Corporation to enhance reliability, public safety and growing demand. In addition to the projects shown on Table 1.18, other examples of electrical generation, transmission and distribution projects included in self-supported capital spending are new substations in Maple Ridge and Langley, redevelopment of the Aberfeldie generating station, and seismic upgrades of the Coquitlam and Stave Falls dams.

Further details on provincial capital investments are shown in the service plans of ministries and Crown corporations.

Projects over $50 million

As required under the Budget Transparency and Accountability Act, major capital projects with multi-year budgets totaling $50 million or more are shown in Table 1.18. Annual allocations of the full budget for these projects are included as part of the provincial government's capital investment spending shown in Table 1.17.

Over the next three years over $1 billion of provincial funding will be spent on major capital investments (greater than $50 million) including:

• $396 million for health care facilities including Vancouver General Hospital, the Academic Ambulatory Care Centre, and the Abbotsford Regional Hospital and Cancer Centre.
• $175 million for major transportation capital infrastructure. In addition, the Ministry of Transportation is investigating financial and project delivery options through P3s for improvements to Lower Mainland infrastructure; the Okanagan Lake Bridge in Kelowna; and the Trans Canada Highway in the Kicking Horse Canyon. Provincial funding for the RAV project is not included in the province's capital spending, but is included in the transportation investment plan.
• $252 million for power generation and transmission capital projects by BC Hydro, BC Transmission Corporation and the Brilliant Expansion Power Corporation.
• $166 million for other projects including the Vancouver Convention Centre Expansion Project and tenant improvements for Surrey Central City (ICBC Properties Ltd.).

Table 1.18 identifies the provincial share of funding for major capital projects (over $50 million). However, total costs for some of these projects are higher as they are cost-shared with the federal government, municipal authorities or the private sector.

Provincial Debt

In 2004/05, provincial debt is forecast to decrease by $1.7 billion to total $36.1 billion, $3.3 billion below budget. In 2005/06, total provincial debt will increase $1.2 billion from the 2004/05 updated forecast to total $37.3 billion. The 2005/06 change reflects:

• a $185 million decrease in government direct operating debt (resulting from cumulative deficits/surpluses of the consolidated revenue fund);
• a $1.2 billion increase in taxpayer-supported debt mainly to finance net capital requirements;
• a $194 million increase in commercial Crown corporation debt, mainly to fund power generation and transmission capital projects by BC Hydro and BC Transmission; and
• a $100 million increase in the forecast allowance to mirror the $400 million income statement forecast allowance.

Over the following two years, government direct operating debt is forecast to decrease $1.2 billion reflecting continued surpluses. Other taxpayer-supported debt will increase $2.2 billion to finance capital requirements. Self-supported debt will increase $1.1 billion, mainly to fund power generation and transmission projects.

The debt forecast assumes a forecast allowance of $400 million in 2005/06, $450 million in 2006/07 and $550 million in 2007/08 to mirror the operating statement forecast allowance. Should the government not require this allowance, projected debt levels under the fiscal plan would be lower by the amount of the forecast allowance for each year.

The government direct operating debt to GDP ratio is forecast to steadily decline from 9.1 per cent of GDP to 7.2 per cent of GDP by 2007/08, reflecting on-going surpluses over the three year fiscal plan.

The ratio of taxpayer-supported debt, which excludes commercial Crown corporations and other self-supported debt, to GDP is a key measure often used by financial analysts and investors to assess a province's ability to repay debt. Consistent with government's strategic plan commitment the taxpayer-supported debt to GDP ratio falls over the three year plan, keeping debt affordable for future generations of British Columbians. In 2005/06 taxpayer-supported debt is forecast to decrease to 18.2 per cent of GDP, 18.0 per cent of GDP in 2006/07 and 17.3 per cent of GDP in 2007/08. The change from the Budget 2004 forecast reflects a $3.5 billion improvement in taxpayer-supported debt in 2004/05, operating surpluses over the next three years and higher GDP forecasts. Taxpayer-supported interest costs are expected to rise to 5.8 cents per dollar of revenue by 2007/08, due to higher interest rates and increased taxpayer-supported capital debt.

Table 1.20 summarizes the provincial financing plan for 2005/06. New borrowing of $3.9 billion is anticipated, of which $2.6 billion will be used to replace maturing debt and $1.3 billion will be used for capital and financing requirements.

Further information on provincial debt can be found in the topic box on page 55 and additional details on the debt outstanding for government, Crown corporations and agencies are provided in Appendix Tables A15 and A16.

Risks to the Fiscal Plan

The risks to the fiscal plan stem mainly from changes in factors that government does not directly control. These include:

• Assumptions underlying revenue and Crown Corporation and agency forecasts such as economic factors, commodity prices and weather conditions.
• The outcome of litigation, arbitrations, and negotiations with third parties, such as the softwood lumber dispute.
• Utilization rates for government services such as health care or employment assistance.

In addition, changes in accounting treatment or revised interpretations of GAAP could have material impacts on the bottom line.

Table 1.21 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, a decrease in natural resource revenues may be offset by an increase in commercial Crown corporation incomes; or as occurred in 2003/04, an increase in the US/Cdn exchange rate can be largely offset by higher commodity prices.

The experience of the 2003/04 fiscal year also demonstrated the tendency for negative fiscal shocks – forest fires, floods, BSE, equalization revenue losses – to be offset by positive variances in other areas – commercial Crown corporation incomes, taxation and energy revenues, and other improvements. In 2003/04, the $500 million forecast allowance was not needed, as the positive effects more than offset the negative fiscal shocks.

By contrast, the 2001/02 fiscal year saw an unexpectedly sharp decline in the economy, as the US went into recession and travel between nations was severely impacted by the aftermath of September 11. In this year, $300 million of the $500 million forecast allowance was used in meeting the bottom line target.

Contingency Vote

A $270 million contingency vote is included in each of 2005/06 and 2006/07 to handle budget overruns by ministries arising from external or unpredicted circumstances or forecast variances. The contingency vote is increased to $310 million in 2007/08 reflecting a $40 million allocation of the $140 million 2010 Olympics contingency budget as part of government's $600 million commitment to the 2010 Games.

Forecast Allowance

In 2005/06, the government continues to build a forecast allowance into the bottom-line to act as a cushion against possible deterioration in revenue or other forecasts, and thus increase the certainty of meeting the balanced budget targets established in the fiscal plan.

A forecast allowance of $400 million is included in the 2005/06 budget. This forecast allowance has the explicit effect of reducing the expected surplus from the government's most likely forecast of $620 million in 2005/06 to a more conservative budget surplus of $220 million. The explicit nature of the adjustment to the surplus flows from the Budget Transparency and Accountability Act that requires disclosure of adjustments to the most likely fiscal result.

A corresponding $400 million borrowing allowance has also been included in the provincial debt forecast for 2005/06, increasing the total debt forecast by $400 million compared to the most likely forecast.

Forecast allowances for the 2006/07 and 2007/08 fiscal years have been increased since the first Quarterly Report in September 2004, and now rise to $450 million for 2006/07 and $550 million for 2007/08. The higher forecast allowances reflect increased risks to the surplus arising from continued high energy prices, and from spending pressures from future public sector wage settlements.

Combined with the forecast surpluses, the total cushion protecting the balanced budget plan against economic, revenue and other forecast risks is $890 million in 2005/06, $920 million in 2006/07 and $1,060 million in 2007/08. The size of these cushions is consistent with the recommendations made by the Fiscal Review Panel in July 2001.

SUCH Sector

SUCH sector forecasts have been provided by management of the various organizations based on broad policy assumptions provided by the Ministries of Health Services and Advanced Education. Forecasts for the combined schools districts have been compiled by the Ministry of Education based on the requirements of the School Act and the amounts of block funding included in the budget. Every effort has been made to ensure that the financial information is compiled in a manner consistent with GAAP as financial information is converted from that provided by the sectors to align with the accounting policies of the government reporting entity. While the lead financial officers and chairs of the board for the health authorities, universities, colleges and institutions have signed off on the reasonableness of these forecasts, final plans are still subject to formal approval of their Boards, as well as approval by School District boards. Final approved plans may therefore differ from the management forecasts included in the budget.

Revenue

The revenue forecast contained in the fiscal plan is based on the economic forecast detailed in Part 3: British Columbia Economic Review and Outlook. Details on major assumptions and sensitivities resulting from changes to those assumptions are shown in Appendix Table A10.

The main areas that may affect the revenue forecast are:

• B.C.'s overall economic performance;
• exchange rate and commodity prices, especially natural gas, lumber, electricity, and coal prices;
• the outcome of the softwood lumber dispute with the US;
• water levels in the BC Hydro system;
• finalization of promised federal funding for child care. Depending on timing and mechanisms used to provide funding, this could lead to an estimated $650 million over 5 years (see the topic box on page 65 for more information). However this would have no impact on the bottom line, since the province would commit these revenues to matching amounts of spending on child care;
• final details of the federal health transfers flowing from the First Minister's Meeting of September 2004 that may affect the accounting treatment and annual amounts of revenues and consequently the spending plans of the Ministry of Health Services; and
• finalization of the mechanism for allocating fixed annual amounts of federal equalizations transfers among provinces. The federal government is establishing an independent panel to advise on mechanisms that may assist in allocation between provinces. The federal government expects to finalize the apportionment between provinces before March 31, 2006. Depending on the mechanism used, BC may receive a portion of these transfers in 2006/07 and 2007/08.

Crown corporations and agencies have provided their own forecasts that were used to prepare the fiscal plan, as well as their statements of assumptions. The boards of those corporations and agencies have 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. In particular, final rulings by the independent BC Utilities Commission on rate increases for BC Hydro and ICBC could lead to different customer rate increases than those assumed here.

New decisions or directions by Crown corporation or agency 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.

In situations where revenue could benefit as a result of a negotiated or litigated settlement, no revenue increases have been assumed except where a published agreement is available. Specifically no assumptions have been made as to potential benefits from a resolution of the softwood lumber dispute with the US. Additionally, due to uncertainty as to the precise conditions and accounting treatment of BC's share of federal Child Care funding signaled in the federal throne speech, or the New Deal plan for gas-tax sharing announced in February 2005, no additional federal transfers have been included in Budget 2005.

Spending

The spending forecast contained in the fiscal plan is based on ministry and taxpayer-supported Crown corporation and agency spending plans and strategies, as well as SUCH sector forecasts. Details on major assumptions and sensitivities resulting from changes to those assumptions are shown in Appendix Table A11 and in ministry service plans. The main spending issues follow.

Public Sector Compensation

The current 'net-zero' compensation mandate that has been in place since January 2002 will continue until March 31, 2006. This mandate has recognized that BC public sector wages continue to be among the highest in the country and sixty eight agreements covering approximately 70 per cent of all employees, have been concluded under this mandate.

As the next mandate is still under development, no specific compensation increase has been included in the fiscal plan, placing a potential pressure on the surplus and forecast allowance in 2006/07 and 2007/08.

With an annual compensation bill of about $15 billion for taxpayer supported entities, and an additional $1 billion in commercial Crown corporations, a hypothetical 1 per cent annual increase in each of 2006/07 and 2007/08 could cost approximately $160 million in 2006/07, and $320 million in 2007/08.

Demand-driven Programs

The government 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 estimate 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.

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, post-secondary education, and community social services. All of these sectors face cost pressures in the form of program demand and non-wage inflation.

The provincial government has implemented legislative changes to provide public sector delivery agencies with greater flexibility to determine how they will deliver services. The lower cost structure made possible by the legislative changes and upcoming accountability contracts with public sector delivery agencies is reflected in this plan. If public sector delivery agencies are unable to achieve the estimated savings, budgetary pressures could arise.

Treaty Negotiations

The government is committed to negotiating affordable, working treaties with First Nations that provide certainty regarding ownership and use of provincial Crown land and resources. The province has concluded Agreements-in-Principle with the Lheidli T'enneh, Maa-nulth, Sliammon, Snuneymuxw and Tsawwassen First Nations and is seeking to reach early Final Agreements with these First Nations and the federal government. The province will therefore focus resources on key opportunities in order to reach final settlements with these First Nations and Canada. Outcomes of negotiations may ultimately affect the economic outlook and the fiscal plan when settlements are concluded.

Capital Risks

The capital spending forecasts assumed in the fiscal plan may be affected by various factors including:

• weather and geotechnical conditions causing project delays or unusual costs;
• changes in market conditions, including service demand, inflation, borrowing costs and wage settlements;
• the outcome of environmental impact studies;
• the accuracy of capital project forecasts;
• the successful negotiation of cost-sharing agreements with other jurisdictions; and
• the success of public-private sector partnership negotiations.

Unfunded Liabilities

The College, Public Service, Teachers and Municipal Pension Plans – the four major public service plans – are joint trusteeship plans. In the event that a plan deficit is determined by an actuarial evaluation, the pension boards are required to address it by contribution adjustments or other means. Any unfunded liabilities (funding basis) are therefore expected to be short term in nature. For example, the most recent actuarial valuation of the Municipal Pension Plan indicated a $789 million liability (funding basis), which is expected to be addressed by an increase to contribution rates of 1.98 per cent to be shared equally by members and employers effective July 1, 2005.

Catastrophes and Disasters

The spending plans for the Ministries of Forests and Public Safety and Solicitor General include amounts to fight forest fires and deal with other emergencies such as floods and blizzards. 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.

Pending Litigation

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. These estimates are based on a historical ten-year average of actual spending. 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). Various legal actions may also establish precedents requiring minimum service levels in various areas of provincial jurisdiction. These developments may also affect 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.