Part 1: THREE-YEAR FISCAL PLAN

Introduction

The September Update continues government's legislated commitment to balance the provincial budget. Following a record surplus of $2.6 billion in 2004/05, the updated fiscal plan forecasts a surplus of $1.3 billion for 2005/06, and surpluses of $600 million in 2006/07 and $400 million for 2007/08.

Since the February 15 budget, the surplus outlook has improved by $1.1 billion in 2005/06, $400 million in 2006/07 and by $200 million in 2007/08, driven by a stronger economic performance. This allows for new funding for government initiatives in priority areas including:

• program enhancements for seniors ($242 million over three years); and
• a commitment to help build a new relationship with First Nations and Aboriginal communities ($100 million in 2005/06).

In addition, since the February 15 budget the province has negotiated funding agreements with the federal government that fund the following initiatives:

• expansion of early learning and child care ($329 million over three years); and
• support for the Mountain Pine Beetle Action Plan ($100 million over three years).

The September Update includes an infrastructure plan to meet the needs of a growing economy and demands for new and upgraded health care and educational facilities. Total infrastructure spending for ministries and taxpayer-supported agencies is higher than the February 15 budget, and funds an additional $243 million in 2005/06, $430 million in 2006/07 and $371 million in 2007/08. This mainly reflects needed infrastructure in the colleges and universities and for health care facilities. More information on the capital spending forecast is found on page 37.

Following a record $1.9 billion reduction in provincial debt in 2004/05, debt is forecast to increase slightly in 2005/06 to total $35.9 billion, and is forecast to rise to $38.0 billion by 2007/08. The increase in debt reflects borrowing needed to support planned infrastructure spending including health facilities, post-secondary institutions, and highways.

Government is committed to keeping debt affordable for future generations of British Columbians. Consistent with this commitment, both the total debt to GDP and the taxpayer-supported debt to GDP ratios continue to fall over the three-year fiscal plan. Additional information on the debt outlook is found starting on page 41 and in the topic box on page 58.

The September Update is prepared on the basis of the ministry and Cabinet structure announced on June 16, 2005. The responsibilities for Land and Water BC (LWBC) are being formally transferred to eight government ministries effective September 30, 2005. Increases to those ministries' budgets are offset by the elimination of LWBC spending over the three-year plan.

To cover potential ministry pressures relating to the reorganization, $20 million has been notionally set aside within the contingencies vote in 2005/06.

The budget plan for BC Buildings Corporation is included in the September Update on a status-quo basis, as details for its incorporation into government have not yet been finalized.

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 (school districts; universities, colleges and university colleges and institutes; and health authorities and hospital societies).

By comparison to the February 15 budget, revenues (before tax measures) are forecast to have increased by $1.5 billion in 2005/06, and by $1.1 billion in 2006/07 and 2007/08. These increases reflect the improved economic outlook, higher commodity prices, additional federal funding and the better than expected results in 2004/05. After deducting the impact of new tax measures in this budget, the change in revenues becomes $1.4 billion in 2005/06, $901 million in 2006/07 and $887 million in 2007/08 (as shown in Table 1.2).

The revenue forecast is described starting on page 31. The revenue forecast also includes the effect of new revenue measures since the February 15 budget totaling $71 million in 2005/06 and $163 million in 2006/07 and 2007/08. These revenue policy changes are detailed in Part 2: Revenue Measures.

The fiscal plan is based on the Ministry of Finance's economic forecast that projects economic growth of 3.4 per cent for 2005, 3.2 per cent in 2006 and 3.1 per cent in 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.

Based on projections for the economy and for commodity prices, total revenues are expected to increase by 3.7 per cent in 2005/06, followed by growth of 0.9 per cent per year on average for the next two years.

The spending plan confirms the spending initiatives tabled with the February 15 budget and provides new funding for government priorities including key program enhancements for seniors. Overall spending is forecast to increase by 7.2 per cent between 2004/05 and 2005/06, as funding is increased in most ministry budgets. Further information on the spending forecast, including the consolidated revenue fund (CRF) spending plan, follows on page 12.

The main risks to the government fiscal plan include economic fluctuations such as exchange rate or sudden commodity price changes, as well as wage and service demand pressures on the expenditure side. These and other risks are more fully described starting on page 44.

A $300 million forecast allowance is provided in 2005/06 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 $600 million in 2006/07, and $900 million in 2007/08, to protect the fiscal plan from revenue risks such as sudden changes in energy prices and from unexpected spending pressures such as natural disasters. The forecast allowances also cover the potential costs of 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 the February 15 budget and Budget 2004, this budget integrates financial forecasts for 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 $25.0 billion in 2004/05 to $27.8 billion by 2007/08 – an 11.3 per cent increase.

This budget confirms government's commitment to health care and education as government's funding priority areas, while taking advantage of the new choices provided by increased revenues to provide additional support to BC's seniors, children, First Nations and the mountain pine beetle response.

Seniors

The September Update builds on government's ongoing commitment for a system of supports for seniors by providing an additional $242 million over three years to assist low-income seniors with the increased cost of living and housing and to strengthen and modernize the full range of services for seniors.

The Ministry of Employment and Income Assistance budget includes an additional $50 million over three years for the Senior's Supplement. Effective in October 2005, eligible seniors receiving the federal guaranteed income supplement will receive a provincial monthly supplement of up to a maximum of $49 per single senior or up to $60 per partner in a married couple. An estimated 39,500 low-income seniors will benefit from this provincial supplement.

The September Update also provides an additional $42 million over three years to fund rent ceiling increases to the Shelter Aid for Elderly Renters (SAFER). The maximum monthly rent ceiling under SAFER will increase by $90 in low cost areas and $180 in high cost areas effective in October 2005 and the program will be expanded to include owners of manufactured homes paying pad rental. These significant rent ceiling increases are the first since 1990, and coupled with the inclusion of owners of manufactured homes, are expected to increase the number of eligible program participants from 12,000 to 19,200 – a 60 per cent increase.

The Ministry of Health will achieve the commitment to add 5,000 new residential, Assisted Living and Supportive Housing beds by 2008. However, many facilities also need to be modernized and updated. The September Update provides an additional $150 million over two years to strengthen and modernize the full range of services for seniors, to support a smooth transition as new beds come on stream and to ensure seniors can age in place where appropriate. This funding will be used to benefit seniors in a number of ways, including:

• the purchase of equipment, such as beds and lifts for improved patient care and comfort, and to reduce strain and injuries for health care providers;
• facility improvements to accommodate higher levels of care; and
• training of case managers in the use of new assessment tools;

Of this new funding, $40 million will be invested directly in services provided by partners such as SUCCESS, Kiwanis and the Salvation Army.

More information on programs for seniors is provided in the topic box on page 51.

Health Care

The September Update reconfirms the investment of growing provincial revenues in British Columbia's funding priorities for health care. Over three years, health care will receive the largest share of funding increases.

By 2007/08, the Ministry of Health budget will increase by over 14.6 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.

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

Regional Health Sector ($1,041 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;
• increasing 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 assessment services for children who have developmental behavioural conditions including fetal alcohol syndrome disorder;
• $70 million is the Ministry of Health's portion of the $73 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;
• $75 million in 2005/06 and 2006/07 to strengthen and modernize the full range of health care services for seniors;
• $70 million budgeted in 2007/08 for the Michael Smith Health Research Foundation which, when combined with the $30 million provided in 2004/05, completes government's commitment of $100 million for the Michael Smith Foundation. This funding will support 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

The September Update builds on government's ongoing commitment to education. Annual funding for K–12 will increase $268 million by 2007/08 compared to 2004/05 funding in Budget 2004. This represents 5.4 per cent growth in annual funding by 2007/08.

Per pupil funding for 2005/06 is estimated at $7,097 per student, a 5.1 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 is 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.

These plans indicate that school districts will use this funding to hire 1,600 more staff, including 630 teachers and 507 educational assistants. Further information on how individual school districts will be spending these funds is available on the Ministry of Education website at: www.bced.gov.bc.ca.

In addition to increased per pupil funding, the September Update 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.

The September Update also reflects the transfer of public library funding to the Ministry of Education, including $12 million in new funding announced in the February 15 budget to provide 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.

Post-Secondary Education

The September Update builds on government's ongoing commitment to increasing access to post-secondary education. Annual funding for post-secondary education will increase by $196 million by 2007/08 compared to 2004/05 funding in Budget 2004. This represents 10.7 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 the September Update the province will fund these new seats at an average of $9,200 per space.

In the February 2005 throne speech, government committed to limit future tuition increases to the rate of inflation, effective September 2005. Recognizing this change will impact the ability of some institutions to raise revenues, and to ensure that provincial seat growth targets continue to be met, the September Update includes $15 million in new funding for universities in 2005/06. Government is continuing to work with post-secondary institutions to ensure that appropriate funding is available to meet government's seat growth targets for 2005/06 and beyond.

In addition to providing funding for the 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 for loans to post-secondary students. As part of a comprehensive student financial assistance system, the September Update 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

Government will spend an additional $573 million over three years to enhance programs and services for children and their families.

The September Update includes an additional $329 million over three years for Early Learning and Child Care (ELCC). In the 2005 Federal Budget, the Government of Canada committed $5 billion over 5 years to ELCC. The provincial government is investing every dollar of BC's share, estimated at $633 million over five years, in regulated early learning and child care for children under 6 years of age. The new ELCC funding will be targeted to improve access to quality child care programs and services, for groups such as lower income families, aboriginal people and children with special needs.

The province will develop and release in November 2005 an Action Plan on ELCC covering the five years of federal funding. The federal government and the province have committed to conclude a detailed multi-year funding agreement, for the period 2006/07 to 2009/10, by December 15, 2005.

This funding will enable the provincial government to help more families meet the challenge of affording quality child care in BC. This will be done by increasing child care subsidy rates and increasing the income exemption for parents with children under six in regulated child care. The province will also be addressing child care operating funding grants to providers as well as capital grants. More information will be available with the release of the Action Plan in November 2005.

The September Update reconfirms $73 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.

The September Update reconfirms $140 million over three years to enhance programs and services for children and youth with special needs and their families. This includes $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 $84 million for enhanced services to children and youth with special needs in the education system.

Communities

The September Update reconfirms the investment of growing provincial revenues in services and programs that support BC's communities. Communities benefit from the additional funding that the September Update 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.

The September Update invests in services that assist individuals and families in need, and includes $78 million over 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 Employment and Income Assistance 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 third highest support rate for persons with disabilities in Canada. The September Update provides $176 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 three years to manage this expected caseload growth.

On July 1, 2005, Community Living BC (CLBC) was established as a Crown agency with the mandate to provide community-based services to individuals with developmental disabilities. Prior to July 1, the Ministry of Children and Family Development (MCFD) delivered adult community living services with program services funded through the ministry's operating and capital budgets. Government transfers through the Adult Community Living Services (ALCS) vote wholly fund CLBC's annual operating budget. In addition, MCFD received a budget increase to the ALCS vote to cover the capital requirements of CLBC. As the additional funding will be used for capital spending, there is no net impact to government's bottom line.

The September Update provides $40 million over three years for emergency shelter programs, housing and support services for people who are homeless.

The Minister Responsible for Housing will provide an additional $15 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. The Ministry of Children and Family Development will provide an additional $1 million for youth beds. An additional $24 million is also being provided through the BC Housing Management Commission (BCHMC) for transition and supportive housing projects that focus on moving people into stable housing arrangements, while related health and other support services will be provided by health authorities and the Ministries of Employment and Income Assistance and Children and Family Development.

The September Update 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. The September Update reconfirms the provision ofan 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.

Beginning in 2005/06, the province is committing $5 million annually to BC Skills Connect for assisting skilled immigrants to obtain accreditation and employment that better matches their training, skills and experience.

The September Update provides for 100 per cent of net traffic fine revenue to be returned to municipalities for community policing, crime prevention and other initiatives to help make communities safer.

The September Update confirms that the BC Arts Council will receive an additional $3 million in annual funding beginning in 2005/06.

Safety

The September Update invests growing provincial revenues to help prevent violence against women, and to protect communities from crime.

The September Update reconfirms the investment of significant funding over 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 three years. The September Update also provides $21 million to fund wage increases for crown counsel in accordance with the provisions contained in the Crown Counsel Agreement Continuation Act (Bill 21).

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. The Ministry of Attorney General has been allocated $7 million over three years to accommodate the impact on the justice system of hiring additional police.

The September Update reconfirms 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

The September Update reconfirms significant initiatives targeting economic development throughout the province.

Agriculture and Aquaculture Initiatives

The September Update provides $8 million for initiatives aimed at enhancing the province's agricultural and aquaculture industries, and protecting food safety:

• $2 million for 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.

As part of the government re-organization announced on June 16, 2005 the functions and staff of Land and Water British Columbia (LWBC) will transfer to various ministries effective September 30, 2005. Most of these functions and staff are being transferred to the Ministries of Agriculture and Lands and Environment. The expense by ministry, program and agency shown in Table 1.4, reflects the transfers of LWBC functions and staff to the respective ministries.

Forestry

The September Update includes $243 million in funding for initiatives to address the economic impacts of the mountain pine beetle outbreak and forest fires, while providing new opportunities to industry and communities.

• $189 million is allocated for incremental manufacturing and economic diversification planning in communities impacted by the mountain pine beetle outbreak. A major reforestation program targeting areas of the province impacted by the mountain pine beetle outbreak and forest fires is also included.

This spending includes $100 million of funding announced by the federal government in March 2005 to be dedicated to costs arising from the mountain pine beetle outbreak. The province continues to pursue additional federal funding for these forestry initiatives in recognition of the potential impact of the mountain pine beetle and forest fires on communities and industry, the need for adjustments in this sector and the continuing contribution of a sustainable provincial forest to Canada's climate change initiatives.

Further information on the province's initiatives to address the mountain pine beetle outbreak can be found in the topic box on page 56.

• $44 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.
• $10 million to replace bridges providing access to remote communities.

Oil and Gas, Mining

The September Update provides $65 million for initiatives to facilitate exploration and continued development of the provincial oil and gas and mining sectors:

• $32 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.
• $16 million to implement the mining plan, including measures to improve mine safety and safety of workers and improved services to the mining sector.
• $17 million for additional oil and gas initiatives, including community and stakeholder engagement.

Infrastructure

The September Update provides $115 million in funding for community infrastructure across the province:

• $5 million in 2005/06 for the new BC Community Water Improvement Program in the Ministry of Community Services targeting projects to improve drinking water and waste management.
• $50 million for major regional sports facilities funded through the Ministry of Economic Development.
• $60 million for major post-secondary sports training facilities funded through the Ministry of Economic Development.

Combined with the $150 million of provincial funding to be provided through existing infrastructure programs from 2005/06 to 2007/08, provincial funding for community infrastructure in the September Update will total $265 million. This provincial funding will leverage additional investments in municipal and regional infrastructure from other levels of government and the private sector.

On April 15, 2005 the province, federal government and the Union of BC Municipalities (UBCM) signed an Agreement in Principle to share a portion of federal gas tax revenues with local municipalities. Between 2005/06 and 2009/10, $636 million in federal funding will flow directly to the UBCM to support environmentally sustainable municipal infrastructure and improvements to transportation infrastructure. As this funding is not flowing through the province, it is not included in either the revenues or expenses of the province.

Tourism

The September Update provides $67 million over three years for Tourism BC, supporting 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 per year.

Peace River Regional District Memorandum of Understanding

The September Update provides $24 million in new funding for a new memorandum of understanding 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, an increase of $8 million per year.

Regional Development Trusts

The September Update provides $150 million in one-time funding for three $50 million trust contributions to support investments in natural resource, tourism and economic development in the north, southern interior and north island coastal regions. This includes additional funding of $30 million to assist northern communities respond to the pine beetle infestation.

First Nations New Relationships Fund

The provincial government is committed to building a new relationship with First Nations and Aboriginal communities. In 2005/06 the provincial government plans to invest $100 million of one-time funding to help First Nations and Aboriginal communities build appropriate capacity to provide effective input and participate in the management of lands, resources and social programs. This will assist First Nations and Aboriginal communities in becoming active, supporting partners in relationships with government, business and other organizations. Further information is provided in the topic box on page 54.

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 the September Update, the province will have funded $309 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 province has approved an increase in the total project budget for the VCCEP from $565 million to $615 million. This increases the total provincial funding commitment to $272.5 million, including an increase of up to $39.4 million in the provincial contribution in 2006/07, and $3.1 million in-kind contribution from the transfer of pipe for pilings from the windup of the Vancouver Trade and Convention Center Authority in 2004/05.

Other sources of funding for the project include $222.5 million from the federal government, $90 million from Tourism Vancouver, and $30 million in commercial revenues. The provincial contribution may be reduced if up-front payments from commercial revenues exceed $30 million.

Further information on the VCCEP can be found on the VCCEP Ltd. website at www.vccep.bc.ca

Transportation Investment Plan

The September Update updates the next three years of the transportation investment plan to reflect current estimates. 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
• the taxpayer-supported debt limit of the BC Transportation Financing Authority (BCTFA) is set at $3.4 billion.

The updated transportation plan provides:

• $2 billion of provincial investment in transportation infrastructure between 2005/06 and 2007/08; and
• $1.6 billion of investment leveraged through federal cost-sharing and partnerships with private partners, local governments and other agencies.

Environment

The September Update reconfirms $123 million for initiatives aimed at environmental protection and land use certainty to facilitate sustainable economic development.

• $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.
• $66 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 from contaminated sites.
• $5 million to increase the capacity of the Environmental Assessment Office to address environmental assessments throughout the province.

• $28 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.

Other changes

The contingency vote has been increased by $50 million annually to allow for unexpected costs or new initiatives. The contingency vote is now set at approximately 1 per cent of total government expense. The September Update also includes $6.3 million over three years for cross-government strategic policy support. This provides for formalization of the Deputy Ministers' Policy Secretariat and inclusion of social priorities, and coordination and management of government's corporate planning process. Since 2004, the Secretariat has been a shared resource for natural resource ministries to work on inter-ministry issues, reporting to participating ministries through a Deputy Ministers' committee. The September Update also includes $1.3 million over three years for communications, research, issues management and policy coordination support for the Office of the Premier.

Public Sector Compensation

The current compensation mandate that has been in place since January 2002 will remain unchanged until March 31, 2006. The majority of public sector unions have settled under this mandate. The remaining groups will continue to be bound by the current mandate.

Collective agreements for almost 90 per cent of public sector employees will be up for renegotiation over the next nine months. 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. Details of the next mandate will be released by the next budget in February 2006.

About 52 per cent of the current BC budget goes towards wages and benefits for public sector workers. To put this in perspective, a 1 per cent increase in wages and benefits costs taxpayers approximately $160 million per year. For example, a 1 per cent increase each year for three years costs about $160 million in year one, $320 million in year two, and $480 million in year three.

Taxpayer-supported Crown Agencies 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 Crown agencies are highway construction (BC Transportation Financing Authority), property assessment, (BC Assessment Authority), social housing (BC Housing Management Commission), transit services (BC Transit), and legal services (Legal Services Society).

As the taxpayer-supported Crown agencies receive most of their funding from ministry budgets, their impact on total government spending is the amount by which their total spending exceeds any grants and transfers made to these entities by the ministries and special offices.

At $1,163 million, net spending forecast by taxpayer-supported Crown agencies for 2005/06 in the September Update is $17 million higher than the projection in the February 15 budget, and $6 million less than the forecast in the Budget 2004 fiscal plan. The increase, compared to the February 15 budget, reflects an increase in operating costs for the BC Transportation Financing Authority (BCTFA). Other forecast spending increases are offset by increased transfers from the CRF.

Revenue and spending of taxpayer-supported Crown agencies are combined with CRF revenue and expenses in Tables 1.3 and 1.4. Revenues and expenses for individual taxpayer-supported Crown agencies are provided in Appendix Table A9.

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, including fees and federal government grants. Revenue and spending of the SUCH Sector entities are combined with CRF revenue and expenses in Tables 1.3 and 1.4. However, revenues and expenses for the individual sectors are detailed in Appendix Table A9.

SUCH sector expenses in excess of government transfers are forecast to be $2.9 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 total spending by school districts for 2005/06 is $85 million higher than in the February 15 budget and $291 million higher than the Budget 2004 fiscal plan. The increase is primarily due to salaries for increased support levels for special needs students, pay equity benefits, 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 total spending by universities and colleges for 2005/06 is $89 million higher than in the February 15 budget and $347 million higher than the Budget 2004 fiscal plan. Government's planned seat expansion will result in increased staff hiring, additional operating costs and higher amortization expense due to increased capital expenditures.

Some post-secondary institutions have forecast deficits for 2006/07 and 2007/08. Government has not approved these forecasts since a funding review is currently underway and will be completed this fall. Upon completion, it is expected that revised forecasts with balanced budgets will be submitted by the institutions reflecting the results of this review. These forecasts will be included in Budget 2006.

• Projected total spending by health authorities and hospital societies for 2005/06 is $158 million higher than in the February 15 budget and $561 million higher than the Budget 2004 fiscal plan. The increase is primarily due to 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 assumed control over services to adults and children with developmental disabilities on July 1, 2005. The establishment of regional aboriginal authorities is expected to 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 agencies, the SUCH sector, and the net income of commercial Crown corporations. Following rapid growth of 14.4 per cent in 2004/05, revenue is forecast to total $34,472 million in 2005/06, up 3.7 per cent over 2004/05 (see Table 1.3).

The 2005/06 forecast includes the effects of 5.5 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 2006/07, revenue is forecast to decline 0.2 per cent reflecting an assumed zero equalization entitlement, lower lumber prices and harvest volumes, reduced ICBC net income, anticipated moderation in housing market activity resulting in lower property transfer tax revenue and moderating energy prices. These are partially offset by the impact of 5.1 per cent nominal GDP growth and increased health and social transfers from the federal government.

In 2007/08, revenue is projected to increase 2.1 per cent incorporating the effects of 4.9 per cent nominal GDP growth and 4.0 per cent higher federal government transfers. These increases are partially offset by declining corporate income tax revenue due to lags in the federal government's collection and instalment payment systems, continued moderation in property transfer tax revenue and the effects of falling coal and metal prices.

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

Revenue changes since February 15 budget

Compared to the February 15 budget, revenue is forecast to be $1.4 billion higher in 2005/06, up $901 million in 2006/07 and $887 million higher in 2007/08 reflecting an improved economic outlook, higher commodity prices, particularly natural gas, and better than expected 2004/05 year end results. The main areas of change are:

• Personal income tax – up $282 million in 2005/06 including a one-time prior-year adjustment due to higher 2004 revenues than anticipated when the 2004/05 books were closed. This, combined with improved personal and labour income growth, results in a $135 million base adjustment in 2005/06, rising to $180 million by 2007/08.
• Corporate income tax – up $140 million and $143 million in 2005/06 and 2006/07 as higher instalments from the federal government and a stronger corporate profits outlook in 2004 and 2005 are partially offset by the effects of reducing the general tax rate to 12.0 per cent from 13.5 per cent.
• Social service tax – up $100 million in 2005/06, rising to $118 million by 2007/08 mainly due to a $90 million improvement in 2004/05 results and stronger economic growth beginning in 2005.
• Property transfer tax – up $190 million in 2005/06 due to the very strong housing market year to date. The reduced improvement in 2007/08 of $130 million reflects moderation in sales activity.
• Energy and minerals – Natural gas royalties are forecast to be up $199 million, $30 million and $175 million since the February 15 plan reflecting higher natural gas prices. The revenue increase is less in 2006/07 mainly due to the changes in the natural gas price forecasts – up $0.83 per gigajoule in 2005/06, $0.40 in 2006/07 and $0.83 in 2007/08. The revenue forecast from other energy and mineral sources is up $117 million, $153 million and $109 million in the revised three year plan due to higher expected electricity and metal prices, and increased bonus bid revenues.

• Forests – up $166 million in 2005/06 reflecting higher spruce-pine-fir prices and harvest volumes, due in part to stronger US demand. Revenue is expected to be down about $60 million in the next two years reflecting the outlook for Coastal log prices at $83 per cubic metre, compared to $91 in 2004/05 and lower hemlock and pulp prices compared to the February 15 plan.
• Federal government contributions – up $131 million, $133 million and $158 million from the February 15, 2005 forecast reflecting increased funding for Early Learning and Child Care announced in the federal government's 2005 budget, assistance to combat the mountain pine beetle infestation, and in support of post-secondary institutions, health authorities and school districts program costs. These increases offset reduced health and social transfers due to improved personal and corporate income tax revenues.

Commercial Crown Corporations Income

• British Columbia Hydro and Power Authority – At $329 million, BC Hydro's income forecast for 2005/06 in the September Update is $66 million less than the projection in the February 15 budget, mainly due to higher energy costs from increased market purchases. BC Hydro income before regulatory transfers for 2005/06 is $119 million less than the forecast in the Budget 2004 fiscal plan.

The forecast reflects the 4.85 per cent rate increase confirmed by the BC Utilities Commission in November 2004. As well, energy costs have increased since Budget 2004 primarily due to increased purchases for electricity trade purposes and to meet domestic demand. These downward pressures are partially offset by reduced finance charges, due to lower debt levels and interest rates, and lower amortization costs reflecting BCUC decisions on amortization rates.

Water inflows to reservoirs, which determine the amount of low-cost hydro generation available to BC Hydro, are forecast to be 95 per cent of normal (based on the August 2005 water inflow estimates) – slightly lower than the Budget 2004 plan, which assumed normal water inflows.

• British Columbia Liquor Distribution Branch (LDB) – At $779 million, LDB's projected net income for 2005/06 is unchanged from the February 15 budget and $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 lower margins. 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, unchanged from the February 15 budget, but $50 million less than the Budget 2004 forecast. Lottery and bingo revenue projections have declined due to lower 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.

A large portion of BC Lotteries' transfers to government is redistributed to charities and local governments. For 2005/06, the government forecasts that it will distribute $215 million of gaming revenue to these entities – $137 million to charities, $63 million to local governments, $9 million in development assistance contributions, and $6 million for horseracing purse enhancement. The net proceeds after distributions will be $677 million, of which $147 million is allocated to the Health Special Account and $530 million will go into general revenue to fund other government priorities, including education and social services.

• British Columbia Railway Company – At $39 million, BC Rail's forecast earnings for government's 2005/06 fiscal year are $37 million lower than the projection presented in the February 15 budget, and $12 million lower than the Budget 2004 outlook. The decrease reflects an extended timeframe for 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 $224 million, a $48 million improvement over the outlook in the February 15 budget. The outlook reflects the premium rate changes announced by ICBC in June 2005. The improvement is due to increased premium revenue from higher sales volumes and higher investment income, partially offset by higher claims costs, including an adjustment to prior year claims estimates, and increased operating costs.

The current outlook for 2005/06 is $227 million higher than the projection in Budget 2004, primarily due to higher investment income and a reduction in projected claims costs. ICBC projects declining net income for 2006/07 and 2007/08 due to rising claims costs, mainly in the area of personal injury claims.

Full-Time Equivalents (FTEs)

Taxpayer-supported FTEs, including ministries and special offices (CRF), taxpayer-supported Crown agencies and regional authorities, is projected at 31,271 in 2005/06. This is 51 FTEs higher than the February 15 budget, due to the formalization of the Deputy Ministers' Policy Secretariat and changes in taxpayer-supported Crown agencies.

By 2007/08, FTEs are projected to increase a further 237 to total 31,508 FTEs. Table 1.17 provides details of changes from the February 15 budget. 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 27,259 FTEs – a net increase of 109 FTEs from the February 15 budget. The increase mainly reflects the transfer of FTEs from Land and Water BC. (LWBC) as part of the recent government reorganization. The increase in ministries due to LWBC is offset by a corresponding reduction in taxpayer-supported Crown corporation FTEs. Ministry FTE's have been restated for the government reorganization announced June 16, 2005.

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 assumed full control over services to adults and children with developmental disabilities effective July 1, 2005. The establishment of regional Aboriginal authorities is expected to 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 agencies

The 2005/06 taxpayer-supported Crown agencies FTE projection is 3,790 – a decrease of 135 FTEs from the February 15 budget. As noted previously, the reduction is primarily due to the transfer of LWBC-related FTE's to various ministries.

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 forecasts include capital infrastructure for school districts, health authorities, post-secondary institutions, taxpayer-supported Crown agencies, and ministries.

Taxpayer-supported capital spending is projected to range from $3.0 billion in 2005/06 to $2.4 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 funding annual costs for post-secondary seat growth, the province is also providing almost $800 million in capital funding for infrastructure to accommodate this growth, replace existing infrastructure and facilitate research activities throughout the post-secondary system. Examples of post-secondary projects included in projected capital spending are a new Kwantlen University College Trades Campus in Cloverdale, a University of British Columbia Centre for International Collaboration On Repair Discovery (ICORD), the Selkirk College Castlegar Aviation Centre and the Thompson Rivers University Williams Lake campus replacement. Post-secondary institutions utilize own-source revenues in addition to provincial funding to finance capital infrastructure.
• The Ministry of Health 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.

The ministry will be investing $66 million over three years to further the implementation of the Electronic Health Record. This includes leveraged funding of $30 million from Canada Health Infoway. Examples of major capital/equipment projects currently underway include: Abbotsford Regional Hospital and Cancer Centre; Nanaimo Regional General Hospital – expansion to improve access to patient care, maternal programs and surgical services on Central Vancouver Island; Vancouver Cancer Centre – radiation therapy annex to accommodate two new and two replacement Linear Accelerators; Academic and Ambulatory Care Centre at Vancouver General Hospital; new academic space in teaching hospitals around BC including Prince George Regional Hospital, Victoria General Hospital and Royal Jubilee Hospital; Bulkley Valley District Hospital – Emergency Department and Diagnostic Imaging renovation; Whistler Health Centre – Emergency Department renovations; purchase of a new mobile magnetic resonance imaging machine (MRI) to serve Cranbrook, Trail and Penticton hospitals; and Picture Archiving Communication Systems in Northern, Interior and Fraser Health Authorities which allow digital images to be shared between hospitals/regions and radiologists. Some of these projects receive funding from various funding partners including Regional Hospital Districts and Foundations.

• Continued implementation of the transportation investment plan which will provide over $3 billion of public and private sector investment over the next three years. Under the plan, provincial capital spending for 2005/06 to 2007/08 includes initiatives such as the Sea-to-Sky Highway improvements, border crossing infrastructure, the William R. Bennett Bridge and funding for Gateway initiatives. Additional details on the Transportation Investment Plan are provided in Table 1.13.
• The Vancouver Convention Centre Expansion Project (VCCEP) – capital spending shown in Table 1.18 is based on the project's total capital cost, reflecting funding provided by all partners (the province, Canada and Tourism Vancouver). Table 1.19 shows the capital expenditures for VCCEP associated with provincial financing only, which totals $273 million.

Table 1.12 provides the timing and amount of provincial funding grants provided to VCCEP. These grants are eliminated in the summary financial statements, so that only the total capital expenditures of VCCEP are reported in the government financial statements.

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

• operating surpluses;
• cash balances;
• cost-sharing with partners (such as federal or municipal governments);
• partnerships with the private sector (public-private-partnerships); 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 (see the topic box on page 58).

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 1.19, 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 1.19. Annual allocations of the full budget for these projects are included as part of the provincial government's capital investment spending shown in Table 1.18.

Over the next three years over $1.2 billion of provincial funding will be spent on major capital investments (greater than $50 million) including:

• $400 million for health care facilities including Vancouver General Hospital, the Academic Ambulatory Care Centre, and the Abbotsford Regional Hospital and Cancer Centre.
• $305 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 and the Trans Canada Highway in the Kicking Horse Canyon. Since the Richmond-Airport-Vancouver rapid transit project (RAV) is not part of government, provincial funding for RAV is not included in the province's capital spending. However provincial grants to RAV are detailed in the Transportation Investment Plan (Table 1.13).

• $265 million for power generation and transmission capital projects by BC Hydro, BC Transmission Corporation and the Brilliant Expansion Power Corporation.
• $257 million for other projects including the Vancouver Convention Centre Expansion Project and tenant improvements for Surrey Central City Mall (ICBC Properties Ltd.).

Table 1.19 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 2005/06, total provincial debt is forecast at $35.9 billion, up $84 million from 2004/05. The 2005/06 change reflects:

• a $1.6 billion decrease in government direct operating debt (resulting from the CRF surplus and improved cash flows);
• a $1.2 billion increase in taxpayer-supported debt mainly to finance net capital requirements;
• a $167 million increase in commercial Crown corporation debt, mainly to fund power generation and transmission capital projects by BC Hydro and BC Transmission; and
• a $300 million forecast allowance to mirror the income statement forecast allowance.

Over the following two years, government direct operating debt is forecast to decrease $1.9 billion reflecting continued surpluses of the CRF. Other taxpayer-supported debt will increase $2.3 billion to finance capital requirements. Self-supported debt will increase $1.1 billion, mainly to fund power generation and transmission projects.

The debt forecast includes forecast allowances of $300 million in 2005/06, $600 million in 2006/07 and $900 million in 2007/08. Projected debt levels under the fiscal plan would be lower by the amount of the forecast allowance for each year should the government not require this allowance. In addition, government has not included the cost of wage settlements in the fiscal forecast, as the wage mandate has not been established. When wage costs are known, this will be reflected in higher taxpayer-supported debt.

The government direct operating debt to GDP ratio is forecast to steadily decline to 6.1 per cent by 2007/08 from 9.3 per cent in 2004/05, reflecting on-going surpluses over the three year fiscal plan. The debt forecast assumes that the expected surpluses will be fully applied to debt reduction. However, should the revenues be lower than forecast or if government allocates some of these surpluses to other areas, the debt forecast would change accordingly.

The ratio of taxpayer-supported debt to GDP, which excludes commercial Crown corporations and the forecast allowance, is a key measure used by financial analysts and investors to assess a province's ability to repay debt. Consistent with government's commitment, the taxpayer-supported debt to GDP ratio falls over the three year plan, keeping debt affordable for future generations of British Columbians.

The taxpayer-supported debt to GDP ratio is forecast to decrease to 17.1 per cent in 2005/06, 16.7 per cent in 2006/07 and 15.8 per cent in 2007/08. The change from the February 2005 budget forecast reflects a $1.3 billion improvement in taxpayer-supported debt for 2005/06 that is carried forward into subsequent years, and higher GDP forecasts. Taxpayer-supported interest costs are expected to rise to 5.4 cents per dollar of revenue by 2007/08, due to higher interest rates and increased taxpayer-supported capital debt.

The total provincial debt to GDP ratio is forecast to drop to 20.9 per cent in 2007/08 from 22.9 per cent in 2004/05. Total debt includes commercial Crown corporations and the debt forecast allowance.

Table 1.21 summarizes the provincial financing plan for 2005/06.

• New borrowing for government operating purposes will not be required as the CRF surplus and improved cash flows will facilitate a $1.6 billion debt retirement.
• New borrowing of $2.3 billion is anticipated for other taxpayer-supported entities, of which $1.1 billion will be used to replace maturing debt and $1.2 billion will be used for capital financing requirements.
• Self-supported entities are expected to borrow $762 million to refinance $595 million of maturing debt and to fund capital projects.
• A forecast allowance of $300 million is included as new borrowing to mirror the operating statement allowance.

Further information on financing capital infrastructure through provincial debt can be found in the topic box on page 58. 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 federal government and for the softwood lumber dispute.
• Utilization rates for government services such as health care, children and family services, or employment assistance.

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

Table 1.22 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, government would have missed its fiscal targets, had it not used a portion of the forecast allowance.

The potential economic impact of Hurricane Katrina in the U.S. gulf coast is continuing to be evaluated. Expectations vary as to the overall economic impact. It is uncertain how much the positive impact of the massive reconstruction efforts will counter the negative impacts of higher oil, gasoline and natural gas prices, or loss of infrastructure on the overall economy. Spikes in commodity prices such as natural gas and lumber may have a positive effect on natural resource revenues in the near-term, until supply-demand imbalances level out.

Contingency Vote

A $320 million contingency vote is included in each of the 2005/06 and 2006/07 fiscal years, representing roughly 1 per cent of overall government expense. The contingency vote is increased to $360 million in 2007/08 reflecting a $40 million allocation of the $140 million 2010 Olympics contingency budget.

The increased allocation to contingencies is a prudent budgeting measure that protects the three-year fiscal plan from:

• unforeseen and unbudgeted costs that may arise (such as the provincial contribution to tsunami relief in Southeast Asia in 2004/05, or unexpected environmental remediation costs); and
• pressures for costs that are currently budgeted based on estimates whose final value are impacted by external events or prices (such as payments made under the Vancouver Island Gas Pipeline Assistance Agreement that are directly linked to natural gas prices).

Table 1.23 outlines cost pressures that government has notionally allocated to the contingency vote across the three-year fiscal plan.

In addition to these specific items, corporate pressures such as the valuation of employer contributions to pension plans or leave liability costs may also impact the contingency vote.

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 spending forecasts, and thus increase the certainty of meeting the surplus targets established in the fiscal plan.

A forecast allowance of $300 million for 2005/06 is included in the September Update. This is $100 million lower than in the February 15 budget, reflecting reduced risk as there are only six months remaining in the fiscal year. This forecast allowance has the explicit effect of reducing the expected surplus from the government's most likely forecast of $1.6 billion in 2005/06 to a more conservative budget surplus of $1.3 billion. The explicit nature of the adjustment to the surplus flows from the Budget Transparency and Accountability Act that requires disclosure of adjustments to the more likely fiscal result.

A corresponding $300 million borrowing allowance has also been included in the provincial debt forecast for 2005/06, increasing the total debt forecast by $300 million compared to the most likely forecast.

Forecast allowances for the 2006/07 and 2007/08 fiscal years are now set at $600 million for 2006/07 and $900 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.

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 and Advanced Education. Forecasts for the combined school 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 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.

Some post-secondary institutions have forecast deficits for 2006/07 and 2007/08. Government has not approved these forecasts since a funding review is currently underway and will be completed this fall. Upon completion, it is expected that revised forecasts with balanced budgets will be submitted by the institutions reflecting the results of this review. These forecasts will be included in Budget 2006.

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:

• BC's overall economic performance;
• exchange rate and commodity prices, especially natural gas, lumber, and electricity prices;
• the outcome of the softwood lumber dispute with the US;
• water levels in the BC Hydro system; and
• finalization of the mechanism for allocating fixed annual amounts of federal equalization transfers among provinces. The federal government has established an independent panel to advise on allocation mechanisms. The federal government is expected 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.

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 (for example BCBC, LWBC and Columbia Basin Trust).

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. Further, no assumptions have been made as to potential federal funding for immigration and training, additional funding for the Pacific Gateway or additional funding for post-secondary education.

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

Collective agreements for almost 90 per cent of public sector employees are up for renegotiation over the next nine months. As the next mandate is still under development, no specific compensation increase has been included in the fiscal plan, placing a potential pressure on forecast allowance in 2006/07 and 2007/08.

About 52 per cent of the current BC budget goes towards wages and benefits for public sector workers. To put this in perspective, a 1 per cent increase in wages and benefits costs taxpayers approximately $160 million per year. For example, a 1 per cent increase each year for three years costs about $160 million in year one, $320 million in year two, and $480 million in year three.

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.

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, Yekooche, and Tsawwassen First Nations. The province is seeking to reach Final Agreements with First Nations and the federal government. The province will therefore focus resources on key opportunities in order to reach final treaty settlements with 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 the shortfall 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 was addressed by an increase to contribution rates of 1.98 per cent to be shared equally by members and employers effective July 1, 2005. The next major actuarial valuation report (for the Public Service Pension Plan) is expected by March 2006.

Catastrophes and Disasters

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