DBRS Confirms British Columbia at AA (high) and R-1 (high), Trends Stable

DBRS has today confirmed the Issuer Rating of the Province of British Columbia (the Province) at AA (high), along with its long-term and short-term debt ratings at AA (high) and R-1 (high), respectively. All trends remain Stable. Despite a weak economic growth outlook, the budget introduced on February 19, 2013, marks the culmination of the Province’s plan to return to fiscal balance in 2013-14. DBRS acknowledges that all budget measures may not be implemented before the upcoming provincial election scheduled for May 14, 2013. Nevertheless, the fiscal progress made to date and a relatively low debt burden in relation to peers provide British Columbia with sufficient flexibility within its current ratings, be it to withstand further economic malaise or a potential relaxation in fiscal discipline.

Preliminary estimates for the fiscal year ending March 31, 2013, now point to a deficit of $1.2 billion, which is somewhat greater than the $968 million forecast at the time of last year’s budget, as weaker than planned revenues were not fully offset by reduced spending. This translates into a DBRS-adjusted shortfall of $3.5 billion, or 1.6% of GDP, once adjustments are made to: (1) recognize capital expenditures on a cash basis, rather than as amortized; (2) exclude the net change in regulatory accounts from income for British Columbia Hydro & Power Authority (BC Hydro); and (3) to exclude the forecast allowance and non-recurring items.

In response to softening economic conditions, the Province announced additional tax measures and continued spending restraint to deliver a small budgeted surplus of $197 million in 2013-14. This translates into a DBRS-adjusted deficit of $1.7 billion, or less than 1.0% of GDP. Total DBRS-adjusted revenues are forecast to grow by 5.3% in 2013-14, assuming real GDP growth of 1.6% in 2013 and 2.2% in 2014. The proposed tax measures include: (1) the introduction of a new personal income tax bracket for individuals earning in excess of $150,000 for two years; (2) a permanent increase in the corporate income tax rate to 11% from 10% beginning April 1, 2013, in contrast to the temporary increase previously planned for April 1, 2014; (3) cancellation of the planned elimination of the small business income tax rate; (4) an increase in the tobacco tax rate; (5) an increase in Medical Service Plan premiums; and (6) phasing out of certain property tax credits for light industry. Excluding the continuation of the small business tax, these measures will account for $585 million in additional revenue if fully implemented. Of note, the Province has indicated that changes to the rates for the income and tobacco taxes do not need to be implemented until late summer 2013 at the earliest. The sale of surplus properties, originally announced in the 2012 budget, and improving natural resource revenues and rising federal transfers will also contribute modestly to revenue growth.

Expenditure growth is forecast to remain well-contained at less than 1.0% in 2013-14. This is primarily dependent on managing wages and salaries through the cooperative gains mandate, which requires any wage increases to be offset by savings within existing departmental budgets without reductions in front-line service. DBRS notes that to date, approximately two-thirds of public sector employees have reached negotiated settlements, which provides a degree of comfort that spending targets can be realized. The hiring freeze implemented last fall will also help to reduce the number of FTEs through attrition. Another important component of the expenditure management plan is limiting growth in health care spending to an average of 2.6% over the three-year forecast horizon. This is to be achieved, in part, by emphasizing patient-focused funding and through efforts to reduce prices paid for generic drugs. This is a more aggressive target than the 3.2% average increase contained in last year’s plan, but is still viewed by DBRS as achievable for a few years, given the government’s superior track record of expenditure control.

Despite weaker than planned fiscal results in 2012-13, debt is expected to come in below projections at $42.7 billion (including unfunded pension liabilities), in part due to better year-end results in 2011-12 and reduced capital spending. Nevertheless, this represents an increase of 9.5% year-over-year. Due to lower than expected debt and revised GDP estimates from Statistics Canada, British Columbia’s debt-to-GDP is forecast at 18.9% for 2012-13, compared to 19.7% at the time of last year’s budget. For 2013-14, debt is forecast to rise by 10.1% to $47.0 billion, boosting the debt-to-GDP ratio to 20.1%, where it is expected to stabilize under the current fiscal plan. This would mark the third-lowest debt burden among Canadian provinces.

While DBRS is encouraged by the responsive measures taken in the February budget to restore fiscal balance, the upcoming provincial election scheduled for May 14, 2013, has the potential to delay or cancel the implementation of some of the aforementioned budgetary measures. Recent opinion polls suggest the New Democratic Party, led by Adrian Dix, have the best chance of forming the next government. DBRS believes this could result in a change in fiscal direction.

It is anticipated that a new budget will be presented in the summer or early fall, at which time DBRS will provide a full report with additional analytical detail.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.