Report C: FINANCIAL MANAGEMENT PLAN

A. Introduction

The Financial Management Plan provides a long-term framework for guiding the provincial government's financial performance and debt position. It brings together all the elements of the province's financial picture including both direct debt, which primarily reflects the accumulation of past budgetary deficits, and debt arising from capital spending for Crown corporations and agencies. Through the annual Debt Statistics Report, the Plan provides the public with a variety of measures to help understand and assess the province's long-term performance. Table H8 provides an historical summary of these measures.

The provincial government and its Crown corporations and agencies borrow to finance operations and capital projects. Borrowing for operations is required when revenues fall short of expenditures and to meet other cash requirements such as loans and investments. Borrowing for capital projects finances the building of schools, hospitals, roads and other forms of infrastructure. These investments provide essential services for today and benefit future generations of British Columbians.

At March 31, 1997, total provincial debt amounted to $29.4 billion, an increase of $0.6 billion from March 31, 1996. In comparison, taxpayer-supported debt, the portion of debt that is wholly or partially funded by the provincial tax base, totalled $21.3 billion, an increase of $1.3 billion from March 31, 1996. Table C6 provides a forecast of changes in provincial debt in 1996/97 and 1997/98, while Table H7 provides a summary of historical levels of debt.

Further information on the categories of debt is provided in the topic box.

 
B. Operating Plan

Provincial government direct debt is incurred to finance deficits in the province's operating accounts and for other financing transactions requiring cash, including loans and investments. Total direct debt is the accumulation of past budget deficits and financing transactions. As at March 31, 1997, government direct debt is estimated to total $11.1 billion, an increase of $0.8 billion from March 31, 1996.

In order to reduce direct debt, the government needs to eliminate its operating deficit and generate surpluses large enough to cover its financing and working capital requirements. Chart C1 shows that since 1991/92, the government has significantly reduced its operating deficit. However, the slower-than-expected economic growth and weak government revenues meant that the government was unable to achieve its direct debt reduction targets over the past two years.

In 1997/98, the government is forecasting an operating deficit of $185 million. When combined with working capital requirements of $345 million, government direct debt is expected to increase by $530 million.

The government is forecasting a balanced budget in 1998/99 and an operating surplus of $110 million in 1999/2000. Future surpluses will be used to reduce government direct debt.

In order to minimize the amount of financing and working capital requirements, which also add to borrowing, the government will identify options to increase sources of cash and reduce its cash disbursements. These actions will include a review of the collection process for accounts receivable and outstanding fines, and a review of loans to businesses and individuals. [Table C1]

 
C. Capital Spending Plan

Borrowing for capital projects finances the building of schools, hospitals, roads, and other forms of provincial infrastructure. These investments provide essential services for today and will benefit future generations of British Columbians.

The need for capital infrastructure in British Columbia is substantial and in many cases unavoidable. Maintaining the existing asset base, replacing aging infrastructure, and meeting the needs of a population which has increased by one million people since 1984, all require capital spending. Existing public infrastructure in British Columbia has an estimated replacement cost of $42 billion, including $14 billion for roads and over $20 billion for educational and health facilities.

The Capital Review (see topic box) estimates that capital expenditures in excess of $1.7 billion per year over the next five years are required to maintain and/or replace existing infrastructure and to meet new program requirements. However, the government will constrain capital spending to $1.1 billion in each of fiscal years 1997/98, 1998/99, and 1999/2000. Some of the difference may be bridged through cost-saving initiatives identified by the Capital Review. Regardless, significant pressures for infrastructure will remain and the government will have to continue to manage expenditures and look for creative solutions to meet infrastructure needs.

 
D. Financial Management Plan

Advice of Business and Labour Panel

In 1995, the government sought advice from a panel of business and labour representatives in the design of a Debt Management Plan. The government received the panel's advice but adopted benchmarks that exceeded those suggested by the panel.

The subsequent slowdown in the provincial economy demonstrated that the benchmarks adopted by the government were not sustainable. As a result, the government again consulted with the business/labour panel in February 1997. The panel repeated its earlier advice and recommended that the government adopt the benchmarks which the panel had originally proposed (see Table C2).

Specifically, the panel reconfirmed that a ceiling of 20 per cent for the ratio of taxpayer-supported debt to GDP is reasonable and that the ratio should fall to 15 per cent by 2015. The panel recommended that, if the ceiling is exceeded, the government should provide a three-year fiscal plan showing how the ratio is to be brought down to 20 per cent. The panel also emphasized the importance of providing infrastructure to meet the demands of a growing population and that the government should explore various alternative financing opportunities for providing capital facilities.

In addition to the advisory panel, the Business Council of B.C. provided independent advice to government in its 1997 Provincial Pre-Budget Submission. This submission endorsed the concept of an independent committee to provide non-partisan advice on both an appropriate taxpayer-supported debt "cap" and targets for future debt reduction. The Council noted that such an advisory committee might recommend a maximum ratio of taxpayer-supported debt to GDP slightly higher than the current ratio of roughly 20 per cent. The Council also noted that a reason to consider a slightly higher debt ratio is that this would provide a fiscal cushion for the province in the event of a serious economic downturn. The Council also recommended the introduction of balanced budget legislation.

Financial Management Plan

Although the government has taken steps to reduce operating expenditures by $750 million over 18 months, has reduced capital budgets, and has taken steps to deliver capital programs more effectively, these measures will not be sufficient to meet the 1995 benchmarks. Further constraints on capital and operating budgets would impair the ability of the government to meet the need for health and education spending and capital investments. The inadequate provision of infrastructure funding might also constrain future economic growth.

Experience with the original benchmarks also demonstrated that any debt plan must be sensitive to economic growth. Accordingly, three economic scenarios have been developed to provide the context for the new Financial Management Plan. [Table C3]

The mid-range scenario is consistent with the Ministry of Finance economic outlook detailed in Report A.

The revised Financial Management Plan is based on the mid-range economic assumptions, the operating plan forecasts, the recommendations of the advisory panel, and the experience of the past two years. For the next three years the targets are: [Table C4]

This plan recognizes the advice of the business and labour panel to reduce the debt-to-GDP ratio to 20 per cent within three years and will require continued restraint on both the operating budget and capital spending.

The Financial Management Plan, premised upon the mid-range scenario, assumes balanced budgets or better, but does not plan for any substantial paydowns of existing direct debt. If higher levels of economic growth are achieved, budgetary surpluses will be generated that can be applied to pay down direct debt, reduce taxes, or provide improved services or infrastructure. If lower levels of economic growth are experienced, corrective action will be taken consistent with the advice received from the advisory panel.

British Columbia's debt-to-GDP position is the lowest in Canada and is not expected to exceed 21 per cent under mid-range or more favourable economic conditions. The government views the present plan as the most prudent course of action to balance the infrastructure needs of the province against the objective of constraining debt. [Chart C2]

Over the next 20 years, the ratio of debt-to-GDP is expected to decline as follows: [Table C5]

The preceding scenario analysis demonstrates the sensitivity of the debt-to-GDP ratio to economic performance and underlines the importance of early corrective action if government is to achieve its targets.

The government will publish the Debt Statistics Report on an annual basis to provide the public with the means to assess the province's progress towards meeting these targets.

 
E. Crown Corporations

Provincial Crown corporations are, for the purposes of debt, classified as either commercial, which means they are self sufficient and receive no government subsidies, or non-commercial, in which case they are subsidized by taxpayers and all of their debt is included as taxpayer-supported debt. The government will be exploring options to improve the financial position of its Crown corporations to reduce their dependence on government.

During the next year, measures to address fiscal problems in the Insurance Corporation of British Columbia and the British Columbia Ferry Corporation will be brought forward. In addition, as of April 1, 1997, the government will transfer one cent per litre of gas tax to the BC Transportation Financing Authority to help ensure that the corporation can continue to fund its capital program.

 
F. Financing Plan

Borrowing Process

Almost all Crown corporation and agency borrowing is done through the fiscal agency borrowing program. Under this program, the provincial government borrows directly in financial markets and relends the funds to Crown corporations and agencies. Borrowing and financing costs remain the responsibility of the Crown corporation or agency. This fiscal agency program provides lower-cost financing to Crown corporations due to the province's strong credit rating and its ability to borrow at lower interest rates.

Sources of Funds

Funds are borrowed by the province from a variety of sources, including public financial markets in Canada, the United States, Europe and Asia, the Canada Pension Plan Investment Fund, private institutional lenders, and provincial trusteed funds. Chart C3 shows that since 1987, the province has actively shifted away from private placements towards public issues. These include BC savings bonds, and issues under the Canadian domestic, Canadian medium-term note (MTN) and Euro MTN programs.

The province continues to diversify its borrowing sources to cultivate strong domestic and international investor demand for British Columbia debt securities; strong demand helps minimize financing costs for the province. A broad investor base is also important given increased competition for funding and the need for multiple funding sources in the face of sometimes difficult and volatile capital markets.

Review of 1996/97

In 1996/97, gross financing for the government and its Crown corporations and agencies totalled $4.3 billion. However, total provincial debt is expected to increase by only $0.6 billion since new borrowings were partially met by drawdowns from the warehouse borrowing program and were offset by debt maturities and the defeasance of some local government debt.

Taxpayer-supported debt increased by $1.3 billion in 1996/97, including a $0.8 billion increase in direct debt and a $0.8 billion increase in taxpayer-supported Crown corporation and agency debt used to fund infrastructure (partially offset by the defeasance of local government debt). The increase in direct debt is substantially higher that the $395 million deficit forecast for 1996/97, due primarily to the loss of anticipated receipts from asset sales and 1995/96 revenue accruals which did not materialize.

Borrowing for capital purposes (Chart C4) included financing for:

-- continued construction of the new fast ferries to service the Vancouver-Nanaimo route;

-- construction of the Duke Point Ferry Terminal south of Nanaimo;

-- continued construction of the Vancouver Island Highway;

-- replacement of the Applied Industrial Technology Centre in Kamloops;

-- construction of the TRIUMF laboratory in Vancouver; and

-- construction of a new Cancer Clinic in Kelowna.

In 1996/97, the province took advantage of relatively low interest rates in the international markets. For the first time, the province sourced funds in the French franc and Japanese Yen (Samurai) markets. In addition, the Swiss franc and US markets were accessed to meet funding needs. To ensure there is minimal foreign currency risk, most borrowing transacted in these currencies was converted to Canadian dollars through forward exchange contracts. (Chart C5) illustrates the borrowing activity by market during 1996/97.

1997/98 Financing Plan

Table C6 outlines the 1997/98 financing plan for the government and its Crown corporations and agencies.

In 1997/98, the provincial government and its Crown corporations and agencies have financial requirements totalling $4.4 billion, including $480 million for sinking fund contributions. Most debt issues with maturities of greater than 5 years are required to have sinking funds to provide for repayment. As part of its ongoing management of debt, Provincial Treasury is planning a review of the government's sinking fund policies.

The 1997/98 financing requirements will be financed through new borrowing in the domestic and international markets. As a result, provincial debt is estimated to total $30.9 billion at March 31, 1998, an increase of $1.4 billion, while taxpayer-supported debt will total $22.6 billion, an increase of $1.4 billion.

Commercial debt is expected to increase 0.9 per cent to total $8.1 billion at March 31, 1998. The British Columbia Hydro and Power Authority will continue to use cash balances to retire high-interest-rate debt issues.

During 1996/97, extensive modelling on the government direct and financing authority debt portfolio was undertaken to determine the appropriate duration and mix of fixed and floating rate debt. While not complete, the interim results indicate that increasing floating rate debt exposure, which is currently at 24 per cent, should reduce interest costs without substantially increasing risk. This policy shift will be gradually implemented during 1997/98.

The capital spending plan for 1997/98 totals $1.1 billion. In addition to the continuation of projects already underway, major 1997/98 capital projects include:

-- starting construction of 37 new schools;

-- construction and renovation of health facilities throughout the province;

-- construction of a replacement for the Royal Jubilee Hospital Diagnostic and
      Treatment Centre in Victoria;

-- purchase of equipment for the Vancouver Island Cancer Centre;

-- planning for expansion of lower mainland transit services;

-- purchases of expansion and replacement buses throughout the province;

-- continued investment in highways rehabilitation and expansion throughout the province; and

-- continued construction of the Vancouver Island Highway.

Budget 97 Reports

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BC Budget 97

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BC Ministry of Finance and Corporate Relations

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