DBRS: British Columbia’s Financial Profile Remains Solid Amidst Weak Economic Outlook

DBRS notes that the recent budget presented by the Province of British Columbia (the Province or British Columbia) points to manageable pressures for the credit profile, although fiscal forecasts are likely to be revised downward in the coming months as a result of the continued deterioration in economic conditions nationally. Nonetheless, several years of prudent fiscal management and marked progress at reducing the debt burden provide the Province with considerable financial flexibility to weather weak fiscal results, as well as potential spending promises arising from the upcoming provincial election.

Faced with a rapidly deteriorating economic outlook, British Columbia’s budget introduced on February 17, 2009, forecasts two years of deficits followed by a return to balance in 2011-12, combined with significant amounts of new debt in each year. For 2009-10 in particular, a deficit of $495 million is forecast, which translates into a DBRS-adjusted deficit of $3.5 billion after adjusting for capital expenditures on a pay-as-you-go basis rather than as amortized by the Province. This compares to a $50 million surplus on the Province’s basis for the year just ending, or a DBRS-adjusted deficit of $2.0 billion. To introduce the latest budget, the Province was required to amend the Balanced Budget and Ministerial Accountability Act, which previously prohibited deficit budgets. Total revenues for the year are forecast to grow by less than 1%, as tax revenue is expected to be relatively flat while higher federal transfers will offset lower natural resource revenues. However, DBRS believes the forecasts carry notable downside risks, especially for corporate and personal income tax receipts, given the weakening momentum besetting the domestic economy.

Total DBRS-adjusted expenditures are set to rise by 4.5% in 2009-10, as the budget focused on providing additional resources for priority areas of health care, education and social services while taking measures to reduce spending in other areas. The Province has also identified administrative and other savings of $589 million in 2009-10, which demonstrates the strong fiscal discipline characteristic of an AA (high)-rated province. However, DBRS does note that British Columbia has discontinued the use of a forecast allowance ($750 million in recent years), which leaves little cushion to absorb unexpected fiscal deviations and still achieve targets.

The budget assumes a contraction in real GDP of 0.9% in 2009. This was conservative at the time of the budget but now appears somewhat optimistic relative to the private sector consensus, which points to a 1.3% decline. DBRS expects the outlook for 2009 to continue to be revised downward over the coming months, also raising doubts with respect to the extent of the rebound anticipated in real GDP for 2010. Several areas of the economy continue to show deterioration, especially the labour market, where the unemployment rate reached 6.7% in February, compared with the 6.2% average for 2009 assumed in the budget, and the number of Employment Insurance recipients was up 47.7% in January versus a year ago. Downside risks are highlighted using the midpoint of the Province’s own fiscal sensitivities, as a 1% change in nominal GDP could change fiscal results by $200 million.

Preliminary results indicate that the Province’s debt-to-GDP ratio will finish the current fiscal year at 16.0% on a DBRS-adjusted basis, up slightly from 2007-08 although down from 22.4% five years ago. This represents the second lowest debt burden among Canadian provinces and shows the considerable capacity British Columbia has to weather the current downturn. Based on budget projections, the debt-to-GDP ratio will rebound to nearly 18% in 2009-10, with more moderate increases foreseen in the two years following due to a rise in capital expenditures and municipal debt. These estimates do not include borrowing for construction of the Port Mann Bridge, a public-private partnership that was recently taken over by the Province and is estimated to add approximately $500 million annually to borrowing requirements over the next five years. Because all costs for the project are expected to be recovered through tolling, however, DBRS anticipates that this debt will be treated as self-supporting rather than tax-supported.

A provincial election is scheduled for May 12, 2009, and as such, it is not expected that the current budget will be passed before the provincial legislature is dissolved. According to the Budget Transparency and Accountability Act, another budget must be presented within 90 days of the appointment of the executive council following the election. There is a risk that the post-election budget could significantly deviate from the one recently introduced, due to either further measures aimed at addressing a deteriorating economic outlook or a shift in priorities created by a potential change in government. DBRS notes that a recent poll points to a 16-point lead for the governing party, while the current government’s strong fiscal track record provides confidence that fiscal prudence and responsibility will be maintained during the campaign. DBRS plans to conduct its formal annual review and publish a full report on the Province when the post-election budget is presented.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.