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UPDATING ALBERTANS The Second Quarter Fiscal Update is comprised of two parts - the updated 2001-02 forecast and the actual results for the first six months of the fiscal year (April 1 to September 30, 2001).
TABLE OF CONTENTS 2001-02 Forecast Actual Results2001-02 Forecast Highlights
Revenue October Update Total revenue is forecast at $21.1 billion. This is $1.6 billion lower than budgeted but $127 million higher than the October Update forecast. The increase from the October Update reflects an increase in dedicated revenue/expense, the reclassification of the spending reduction associated with the Alberta Children’s Hospital in Calgary as a refund of expenditure (which increases revenue), and higher Alberta Gaming and Liquor Commission revenue. Non-Renewable Resource Revenue Total non-renewable resource revenue is forecast at $6 billion, $1.5 billion lower than estimated in the budget. Total revenue is unchanged from the October Update. However, reflecting actual prices and recent developments, changes have been made to the October Update forecast of oil and natural gas prices. Natural gas royalties are forecast to be $1.6 billion lower than budgeted. Economic uncertainty and increased production have combined to weaken prices. Natural gas prices are forecast to average Cdn$3.85 per mcf for the fiscal year. This is $1.18 lower than budgeted but 10 cents higher than in the October Update. Year-to-date prices (April to November) have averaged about Cdn$4.30 per mcf. Prices for the last four months of the fiscal year (December to March) are expected to average about Cdn$2.90 per mcf. Oil royalties are forecast to be $112 million lower than budgeted. Uncertainty over whether OPEC and non-OPEC producers can reach an agreement on cutting oil production has resulted in volatile oil prices in November. Reflecting this volatility, the oil price forecast for the fiscal year has been lowered to US$23.50 per barrel. This is $1.50 lower than the budget and October Update forecasts. Year-to-date prices (April to November) have averaged about US$26.00 per barrel. Prices for the last four months of the fiscal year (December to March) are expected to average about US$19.00 per barrel. The impact of lower prices has been partly offset by a $169 million increase in land sales and a lower-than-forecast US/Canadian exchange rate. Income Tax Revenue The forecast of income tax revenue is unchanged from the October Update and $125 million higher than the budget estimate. Personal income tax revenue is up $250 million from the budget, mainly due to the prior year adjustment reported in the First Quarter Update. This increase is partly offset by a $125 million reduction in the forecast of corporate income tax revenue, due to weakened economic conditions. Transfers from Government of Canada As reported in the October Update, transfers from the Government of Canada are expected to be higher than budgeted. The Canada Health and Social Transfer is $104 million higher than the budget estimate due to updated data from the federal government. Other federal transfers, primarily for agricultural support, are $43 million higher than the budget estimate. Investment Income Investment income is $533 million less than estimated in the budget. As noted in the October Update, weakness in world equity markets has resulted in realized capital losses and write-downs of investments, particularly in the technology sector. Net Income From Commercial Operations Net income from commercial operations is $118 million higher than budgeted. This is almost entirely due to higher lottery and liquor revenue. Other Revenue Other revenue is $66 million higher than budgeted. Lower revenue from the freehold mineral rights tax (down $59 million) and timber rentals and fees (down $24 million) have been more than offset by other net revenue increases. Increases include a $45 million refund of expenditure associated with the Alberta Children’s Hospital, a $43 million increase in restricted revenue and expense of the Alberta Dairy Control Board, a $20 million increase in school property tax revenue due to a reduction in the allowance set aside for assessment adjustments and appeals, and $41 million in other net increases.
Expense The $1.26 billion in corrective actions, announced in the October Update, included $735 million in deferred infrastructure projects, a $285 million lapse in energy assistance programs and $240 million in other savings. Since the October Update, additional savings have been identified in several ministries. Partly offsetting these savings is higher-than-budgeted spending in a few areas. In the First Quarter Update, increases were primarily provided for health, drought assistance and forest fire fighting costs. In the Second Quarter Update, additional increases are required for forest fire fighting, crop insurance, Crown prosecutors and an aboriginal agreement. Program expense is now forecast to be $875 million lower than budgeted but $109 million higher than in the October Update. The increase from the October Update reflects the above noted spending changes, increases in dedicated revenue/expense and the reclassification of the Alberta Children’s Hospital deferral as a refund of expenditure (increases revenue). Aboriginal Affairs and Northern Development spending is expected to increase by $33 million to implement a proposed agreement with the Peigan First Nation and the Canadian government. Agriculture, Food and Rural Development spending is $177 million higher than budgeted. This reflects the cost of drought disaster assistance and higher crop insurance expenditures. It also includes a $43 million increase in the restricted revenue and related expense of the Alberta Dairy Control Board. Community Development expense is down $29 million primarily from deferral of some centennial projects. Finance spending is $31 million lower than budgeted primarily related to changes to valuation adjustments. Gaming spending is $13 million less than budgeted as a result of reductions to lottery funded programs. Health and Wellness spending is $119 million higher than budgeted. The $211 million increase reported in the First Quarter Update has been partly offset by $92 million in corrective actions. Human Resources and Employment spending is down $30 million due to lower costs for Supports for Independence, Labour Market Development and Skill Development programs. Infrastructure spending is $787 million lower than budgeted due to:
Innovation and Science program spending is forecast to be $48 million less than budgeted. This includes a deferral of $10 million in SuperNet funding to 2002-03 and reallocation of $37 million in program spending to capital investment. Justice spending is $7 million higher than budgeted. Increased funding for Crown prosecutors, Justices of the Peace and to address recommendations of the 2000 Judicial Compensation Commission has been partly offset by reductions in other areas. Learning spending has been reduced by $42 million from budget. A $25 million spending lapse was announced as part of the October Update. A further $17 million is being lapsed, including $13 million for budgeted one-time capital costs of post-secondary facilities which will now be funded by Infrastructure rather than Learning. Municipal Affairs spending is down $33 million primarily due to the deferral of some funding for the Underground Petroleum Storage Tank Program. Sustainable Resource Development spending is $98 million higher than budgeted due to forest fire fighting costs. Transportation spending is $288 million lower than budgeted. This includes $266 million in deferred capital projects ($14 million in additional project deferrals are reported in capital investment) and $22 million in other lapsed spending. Debt Servicing Costs are $75 million higher than budgeted. The lower value of the Canadian dollar increases the foreign exchange provision on US dollar debt.
The Net Change in Capital Assets affecting Operations is $16 million higher than budgeted. This primarily reflects the reclassification of $37 million of SuperNet program expense (Innovation and Science) as capital investment. Partly offsetting this increase in capital investment are deferred capital projects in Infrastructure and Transportation.
Allocation of Economic Cushion Without undertaking the corrective actions announced in the October Update, the province would have faced a $1.2 billion deficit (based on first quarter spending commitments). Corrective actions include a net reduction of $1.153 billion in spending and $65 million in revenue adjustments. Revenue adjustments include a $20 million increase in school property tax revenue due to a reduction in the allowance set aside for assessment adjustments and appeals, and a $45 million refund of expenditure for the Alberta Children’s Hospital. The $1.153 billion in net spending reductions include:
The Second Quarter Update includes a $57 million increase from budget ($40 million increase from First Quarter Update) in dedicated revenue and expense changes, including:
In addition, $93 million in drought assistance reported in the First Quarter Update was declared a disaster program.
Accumulated debt (including cash set aside for future debt repayment) is forecast to decline to $6.3 billion by March 31, 2002. This is $128 million lower than estimated in the budget. The lower forecast of accumulated debt in 2001-02 is primarily due to:
As noted in Budget 2001, there is a three-month lag in receiving cash from natural gas royalties. This resulted in a large negative cash adjustment in 2000-01 and a corresponding large positive cash adjustment in 2001-02. The cash adjustment has become larger due to expected lower royalties in the last quarter of the 2001-02 fiscal year. As noted in the First Quarter Update, the 2001-02 cash adjustment has also increased due to administrative changes in natural gas deposit policy and when payments are due on fiscal year-ends ending on weekends. Higher cash payments will be received in 2001-02 and lower payments in 2002-03. The lower retained income of funds and agencies reflects the lower investment income of endowment funds. These changes have more than offset the lower debt payment from the economic cushion in 2001-02. However, these changes will result in less cash than originally forecast being available for debt repayment in future years. Overall, accumulated debt on March 31, 2004 is expected to be about $600 million higher than forecast in Budget 2001. At March 31, 2002, the net assets of the province are forecast at $9.0 billion (excluding pension obligations).
Cash Available for Debt Repayment
Sensitivities to Fiscal Year Assumptions, 2001-02
Actual ResultsFor the first six months of 2001-02Method of Consolidation This financial summary is prepared on the same basis as used in Budget 2001. The results of all government departments, funds and agencies, except those designated as commercial enterprises, are consolidated on a line-by-line basis. Revenue and expense transactions between consolidated entities have been eliminated. The accounts of Crown-controlled corporations and provincial agencies designated as commercial enterprises are consolidated on an equity basis, the equity being computed in accordance with generally accepted accounting principles. Basis of Financial Reporting The consolidated fiscal summary reports revenue (including proceeds from sale of capital assets), expense (including amortization of capital assets), and net revenue. Consistent with the policy that capital assets are not included in the province’s financial assets, losses on disposal and write-downs of capital assets do not affect revenue, expense or net revenue for the period. The intermediate result of operations (net revenue) is then adjusted for the difference between capital investment and capital asset amortization. The final result is the consolidated net results of operations subject to the Fiscal Responsibility Act. Expense includes the province’s annual cash payments towards the unfunded pension obligations. Expense excludes the annual change in the unfunded pension obligations, which is a non-cash expense that does not affect borrowing requirements. Revenue and expense are recorded using the accrual basis of accounting. Cash received for goods or services which have not been provided by period end is recorded as unearned revenue. Debt servicing costs include interest payable, amortization of discount on debt issues, and amortization of unrealized exchange gains and losses on unhedged foreign currency debt. Comparative 2000-01 figures have been restated where necessary to conform to 2001-02 presentation.
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