Part 4: 2004/05 UPDATED FINANCIAL FORECAST (THIRD QUARTERLY REPORT)

Introduction

The surplus forecast for 2004/05 has declined by $504 million from the second Quarterly Report forecast, mainly due to a number of one-time priority spending initiatives and accelerations totaling $452 million. At $1.44 billion, the surplus is now projected to be $1.34 billion higher than forecast in the February 17, 2004 budget.

2004/05 Fiscal Year in Review

The government's plan to balance the budget in 2004/05 received some major boosts due to robust economic performance and higher commodity prices, as well as a net $680 million increase in federal transfers.

In addition to increased federal transfers, major revenue changes include higher tax revenues from a variety of sources, natural resource revenue and commercial Crown corporation net income. Revenue gains were offset by the reduction in the provincial sales tax and further tax measures contained in the February 15, 2005 budget. The improvement since budget also benefited from lower debt interest costs, but was offset by higher than anticipated forest fire and flood costs.

The above improvements enable government to accelerate key initiatives and plan some priority expenditures totaling $452 million. Supplementary Estimates will be introduced to authorize this additional spending. Further details are provided in Table 4.3.

Changes since the Second Quarterly Report

The forecast surplus for 2004/05 has declined $504 million from the second Quarterly Report forecast, and is now projected to be $1.34 billion higher than the February 17, 2004 budget.

Since the second Quarterly Report in November:

• Total revenue, including commercial Crown corporation net income, increased $107 million. Taxpayer-supported revenue is up $63 million as higher revenue from miscellaneous sources and federal government transfers were partially offset by reductions in natural resource revenues and taxation revenues. Commercial Crown corporation net income increased by $44 million, primarily due to BC Hydro receiving an arbitration payment of $137 million from Alcan Inc. partially offset by lower results due to BC Rail's increased provisions for liabilities related to its Vancouver Wharves subsidiary.
• Total spending increased $611 million from the previous forecast. The Consolidated Revenue Fund (CRF) spending forecast increased $965 million, mainly due to the impact of the initiatives to be funded through supplementary estimates, partially offset by reduced debt servicing costs. BC Transportation Financing Authority (BCTFA) will retain the transfers it receives from the CRF to reduce its capital debt. This has the effect of offsetting the CRF expense. Other taxpayer-supported Crown corporation and agency expenses and adjustments have increased by $157 million, reflecting BCTFA's additional contribution to the RAV project and a change in accounting policy to include defeased debt interest expense. SUCH sector net spending increased by $39 million, mainly by health authorities.
• The forecast allowance is unchanged at $300 million in recognition of revenue and other uncertainties remaining until the accounts for the full year are completed.

Table 4.2 provides more details on developments since the second Quarterly Report.

Revenue

The revenue forecast update reflects trends experienced in the first nine months of the fiscal year. During the first three quarters ended December 31, 2004, revenue was $1,297 million higher than expected, reflecting stronger revenues from taxation, energy, forests, fees and miscellaneous sources and improved commercial Crown corporation net incomes.

The full-year revenue forecast is up $107 million from the second Quarterly Report, and $2,086 million higher than the Budget 2004 forecast. Significant changes since the second Quarterly Report include:

• Personal income tax – down $25 million mainly due to the impact of the Budget 2005 measures totaling $30 million, that reduces taxes for low and moderate income taxpayers.
• Corporate income tax – up $42 million due to higher instalments from the federal government and higher-than-expected final BC tax assessments for the 2003 tax year.
• Social service tax – down $25 million reflecting weaker collections in the October to December period.
• Energy and minerals – down $22 million as lower bonus bid sales and lower revenue from minerals and sales of electricity under the Columbia River Treaty are partly offset by higher natural gas royalties.
• Forests – down $100 million as weaker third quarter results reflect lower-than-expected stumpage rates due to falling lumber prices and a rising Canadian dollar during the October to December period.
• Medical Service Plan premiums – up $51 million mainly due to a change in the accounting treatment of premium revenue and allowance for doubtful accounts. Previously only the net revenue was recorded.
• Health and social transfer payments – up $36 million mainly due to higher entitlement for prior years. The forecast assumes that additional cash to be received in 2004/05 as a result of the September 2004 First Ministers' Meeting will be deferred to future years and matched with increased expenditures beginning in 2005/06.

Commercial Crown Corporation Net Income

• BC Hydro projects operating results of $310 million (before regulatory transfers) for 2004/05, a $100 million improvement since the update provided in the second Quarterly Report. The improvement is primarily due to the $137 million payment of an arbitration award by Alcan Inc. to Powerex for indemnities Alcan issued as part of a power sales arrangement with Enron Power Marketing Inc. The improvement is partially offset by higher energy costs, as ice conditions on the Peace River have restricted hydro generation and resulted in BC Hydro having to purchase energy to meet demand.
• The Liquor Distribution Branch has improved its projected result for 2004/05 by $8 million primarily due to reduced operating costs.
• The BC Rail earnings during government's 2004/05 fiscal year are forecast to decrease by $69 million since the second Quarterly Report, primarily due to increased provisions for liabilities related to its Vancouver Wharves subsidiary. BC Rail also wrote-down some of its assets at Vancouver Wharves.

• ICBC's impact on the government's bottom line is a $5 million improvement over the forecast in the second Quarterly Report, as a slight increase in revenue and reduced operating costs were partially offset by an increase in projected claims costs.

Further details on the full year revenue forecast are shown in Table 4.10 and key assumptions are provided in Appendix Table A10.

Expense

Government expense includes spending for ministries and other programs of the Consolidated Revenue Fund (CRF), combined with the expense of taxpayer-supported Crown corporations and agencies and the SUCH sector (schools, universities, colleges and health authorities/hospital societies). The total expense forecast of $31 billion is $546 million higher than budget and $611 million higher than the second Quarterly Report (see Table 4.2). The higher forecast is due primarily to spending to be funded through Supplementary Estimates.

Consolidated Revenue Fund expense

CRF spending is forecast to be $965 million higher than the second Quarterly Report forecast. This is due primarily to spending for priority initiatives through planned Supplementary Estimates, partially offset by lower forecasts for debt interest costs and the costs associated with the transfer of Crown land.

2004/05 Priority Spending

Through a combination of one-time increases in federal funding and other revenue gains, the province has an opportunity to fund or accelerate a number of priority initiatives in 2004/05 in areas including the natural resources sector, communities and safety, infrastructure, transportation, tourism, and the environment. While there is a sufficiently large surplus to fund these priority initiatives, there is currently no legislated funding appropriation.

Therefore, government intends to introduce Supplementary Estimates to obtain the necessary legislative appropriations to fund these priority initiatives. The proposed Supplementary Estimates would provide new legislative appropriation in 2004/05 of $452 million for priority initiatives and $550 million for the reduction of BC Transportation Financing Authority debt (there is no bottom line impact associated with the transfer of funds to the BCTFA).

Advanced Education – $10 million:

• $10 million for matching research funds. Further details on this funding will be announced at a later date.

Agriculture and Food – $28 million:

• $12 million for assistance to producers as part of the provincial response to BSE and avian flu.
• $16 million for other initiatives including crop insurance funding, research, innovation and increasing the competitiveness of the BC food industry.

Community, Aboriginal and Women's Services – $66 million

• $26 million for local government infrastructure funding through the Canada/BC Infrastructure Program.
• $40 million for a one-time grant to address historical infrastructure requirements in North East BC.

Energy and Mines – $25 million:

• $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.

Forests – $112 million:

• $50 million for the commitment to increase the Forestry Revitalization Trust to $125 million.
• $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.
• $12 million for reforestation.

Human Resources – $10 million

• $10 million as a result of additional spending to provide assistance to persons with disabilities.

Public Safety and Solicitor General – $3 million

• $3 million for police equipment associated with the provincial commitment to add 215 officers to the provincial police force.

Small Business and Economic Development – $162 million

• $25 million to establish an Arts and Culture Endowment and Development Fund, to leverage private sector support to build endowments for arts and culture organizations and assist with development and sustainability initiatives.
• $15 million to LegaciesNow for sports activities targeting capacity, sustainability and performance.
• $66 million for municipal and regional infrastructure funding under the Community Development Initiative.
• $2 million for funding under the Western Economic Partnership Agreement.
• $40 million to accelerate funding for 2010 Olympics venues.
• $14 million for tourism initiatives. Further details on this funding will be announced at a later date.

Sustainable Resource Management – $28 million

• $25 million for the investigation and remediation of contaminated sites on Crown land.
• $3 million for water rental remissions to BC Hydro.

Transportation – $550 million:

• $550 million to reduce the debt requirements of the BC Transportation Financing Authority. This grant will not impact the bottom-line of the province on a summary financial statement basis. This is explained in further detail in the topic box at the end of Part 1.

Water, Land and Air Protection – $8 million:

• $8 million for acquisition of parkland and other conservation activities.

Updated 2004/05 Spending Forecast

In addition to the priority spending initiatives listed above, the main changes to the 2004/05 forecast since the second Quarterly Report are:

• The Ministry of Attorney General is currently forecasting expenses under the Crown Proceeding Act to be $4 million less than budget.
• Management of public funds and debt (debt interest) is forecast to be $23 million lower than the second Quarterly Report and $109 million below budget for the year, reflecting significantly lower borrowing requirements for government operating purposes and lower debt balances at the start of the year.
• Emergency response costs resulting from fires and floods are forecast to be $15 million above budget, which is reflected in the full year forecast for the Ministry of Public Safety and Solicitor General. The second Quarterly Report included a $6 million pressure for emergency preparedness and response costs.
• In accordance with generally accepted accounting principles, expenses for transfers of Crown lands at rates below market value are fully offset by a corresponding revenue amount, and therefore these transfers have no impact on the government's bottom line or debt. Expenses and revenues for transfers of Crown land at rates below market value are forecast to be $74 million below budget, $34 million lower than the second Quarterly Report.

As shown in Table 4.4, other pressures being managed total $50 million for 2004/05 and include:

• Advanced Education – pressure reflects government's commitment to invest in the creation of the Irving K. Barber BC Scholarship Program.
• Corporate – pressure reflects potentially higher than forecast costs for the employer portion of employee benefits.

Spending commitments and pressures totaling $144 million have been notionally allocated to the contingencies vote (see Table 4.5). These allocations include:

• $32 million for government's commitment to return 100 per cent of net traffic fine revenue to local municipalities starting in 2004/05.
• $25 million for government's commitment to provide community grants to the Union of BC Municipalities.
• As part of the 1995 Vancouver Island Gas Pipeline Assistance Agreement, the province is required to make payments to Terasen Inc. for the value of a volume of natural gas set out in the agreement. Higher than forecast natural gas prices are expected to increase the estimated payment required for 2004/05 by $10 million. However, this is more than offset by increased provincial revenues resulting from the higher natural gas prices.
• Up to $14 million for the provincial response to avian flu and Bovine Spongiform Encephalopathy (mad cow disease).
• Up to $9 million for costs related to the Pickton, Air India and Eron trials.
• $14 million for government commitments to the BC Trust for Public Lands, Living Rivers, and Species at Risk (mountain caribou).
• $3 million for government's commitment to the 2010 Olympics Live sites program.
• $8 million for government's commitment to aid Southeast Asian Tsunami Victims and $1 million for provincial coastal communities at risk from tsunamis to ensure they are properly prepared.
• $12 million for government's response to the Filmon Report on forest fires.
• $5 million to reflect potential additional re-investments of the gain from the BC Rail Investment partnership. This is based on current estimates, the amount of the gain is not expected to be finalized until March 2005.
• $2 million in transition funding under the BC Settlement and Adaptation Program for the delivery of services to new immigrants and refugees, including English as a Second Language programs.
• $2 million for initiatives to begin implementing the Mining Plan.
• $5 million for transition and supportive housing projects for homeless individuals.
• $2 million for government-to-government negotiations with First Nations for land and resource management plans.

During the first nine months of the fiscal year, total CRF spending (ministries, special offices and other programs) was $116 million above budget, reflecting higher forest fire costs and distribution of proceeds from the BC Rail investment partnership, partially offset by below-budget spending in most programs and lower debt interest costs (see Table 4.11).

Other expense

In total, taxpayer-supported Crown corporation and agency expense (net of internal transfers) is forecast to be $354 million lower than the projection in the second Quarterly Report. The main changes are:

• An additional $550 million transfer to the BC Transportation Financing Authority will reduce taxpayer-supported Crown corporation net expense.
• Other taxpayer-supported Crown corporation and agency expenses, net of transfers, are up $157 million from the second Quarterly Report. The change includes the impact of broader implementation of the accounting policy change for sinking funds to include debt defeasance trust expense ($63 million). As well, the BC Transportation Financing Authority will contribute an additional $50 million to the RAV project in 2004/05. Other changes primarily reflect an increase to the adjustment for bad debt expense.
• A $39 million increase in SUCH sector expenses, net of transfers, from the second Quarterly Report is primarily due to increased spending by health authorities.

Capital Spending and Provincial Debt

Since the second Quarterly Report, the capital spending forecast has increased $103 million to total $3.2 billion, and remains $253 million above the Budget 2004 amount of $2.9 billion. The change from the second Quarterly Report is mainly due to increased spending for health facilities (reflecting commencement of the Abbotsford Regional Hospital and Cancer Centre), education facilities (K-12 schools, partially offset by delays in post-secondary education projects) and ministry minor capital purchases.

Significant changes since the second Quarterly Report are shown in Table 4.7. Further details on capital spending are shown in Table 4.13. Information on updated forecasts for major capital projects (those with multi-year budgets totaling $50 million or more) is provided in Table 4.14.

Provincial debt is forecast to total $36.1 billion at year-end, 23.3 per cent of GDP, while taxpayer-supported debt is expected to total $28.6 billion or 18.5 per cent of GDP. The debt to GDP ratios forecast in Budget 2004 for total and taxpayer-supported debt were 26.8 per cent and 21.8 per cent respectively.

The total debt forecast is $898 million lower than the second Quarterly Report mainly due to lower BC Transportation Financing Authority debt (resulting from a cash contribution from the provincial government to help finance the transportation investment plan), clarification of the accounting treatment of the indemnity to CN related to tax attributes – as a contingent liability and not guaranteed debt (after consultations with the Office of the Auditor General), and improved operating results and lower financing transactions for BC Hydro (see Table 4.7). The decreased forecast continues a trend that saw the debt forecast decline by $2.4 billion as of the second Quarterly Report. Total debt is now forecast to be $3.3 billion below budget.

Further information on the debt forecast is shown in Table 4.15.