Alberta Finance - Budget Updates - 2003-04 1st Quarter Budget Update

First Quarter Fiscal Update
2003-04 Quarterly Budget Report

Released: August 27, 2003

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UPDATING ALBERTANS

The First Quarter Fiscal Update is comprised of two parts – the updated 2003-04 forecast and the actual results for the first three months of the fiscal year (April 1 to June 30, 2003).

TABLE OF CONTENTS

2003-04 Forecast

Highlights
Revenue
Expense
Alberta Sustainability Fund
Capital Plan
Net Financial and Capital Assets
Assets, Liabilities and Net Assets
Net Financing Requirements
Fiscal Year Assumptions

Actual Results

Consolidated Fiscal Summary
Expense

2003-04 Forecast

Highlights

Total revenue is $1.7 billion higher than estimated in the budget. The increase primarily reflects higher non-renewable resource revenue.
Total expense is $580 million higher than budgeted. The increase is primarily due to agriculture and forest-fire disaster and emergency assistance. Partly offsetting these increases are lower debt servicing costs.
Net Revenue (revenue minus expense, prior to Sustainability Fund and Capital Account transfers) is forecast at $2.2 billion. This is $1.1 billion higher than estimated in the budget.
Funding for agriculture and forest-fire disaster and emergency assistance has been provided through the Alberta Sustainability Fund. Funding for other in-year spending initiatives has been provided from the $210 million Contingency Allowance set aside in the budget. $98 million remains unallocated in the Contingency Allowance.
The net assets of the Sustainability Fund are forecast to reach $3.4 billion by March 31, 2004. The net transfer from 2003-04 operations is forecast at $2.5 billion. Approximately $900 million in cash is also being transferred to the Sustainability Fund, primarily reflecting cash from natural gas royalties accrued in 2002-03.
The Sustainability Fund was established to help protect budgets from volatile revenue and the costs of emergencies and disasters. The Fund is the first priority for year-end surpluses until it reaches $2.5 billion. The government will consider, later in the fiscal year, the potential reallocation of dollars above the $2.5 billion target to other balance sheet improvements.

Revenue

Non-Renewable Resource Revenue

Non-renewable resource revenue is forecast at $6.3 billion. This is $1.5 billion higher than estimated in the budget.

The increase in non-renewable resource revenue primarily reflects higher-than-estimated energy prices. The positive impact of higher prices has been partly offset by a strengthening Canadian dollar relative to the U.S. dollar.

Natural gas royalties are forecast at $4.7 billion. This is $1.2 billon higher than estimated in the budget. Natural gas prices are now forecast to average Cdn.$5.00 per thousand cubic feet (mcf) for the fiscal year, 95 cents higher than estimated in the budget. Higher natural gas prices are the result of continued high oil prices, limited North American supply growth, increase in demand and low storage levels.

Total oil royalties are forecast at $862 million. This is $257 million higher than estimated in the budget. Oil prices are now forecast to average US$25.00 per barrel for the fiscal year, US$1.70 higher than estimated in the budget. The forecast is based on OPEC managing supply, continued problems in re-introducing Iraqi production and strengthening world demand due to improving economic conditions.

No assumption has been built into the first quarter energy forecast concerning the potential impact of the recent Alberta Energy and Utilities Board decision to shut in natural gas wells to permit bitumen extraction. The potential impact on energy revenue remains uncertain.

The Fiscal Responsibility Act requires non-renewable resource revenue above $3.5 billion to be transferred to the Sustainability Fund. This transfer is now forecast at $2.8 billion.

Tax Revenue

Total tax revenue is essentially unchanged at over $9.8 billion. Personal income tax revenue has been reduced by $35 million based on updated 2002 personal income tax data. Tobacco tax revenue has been reduced by $5 million reflecting the announced cigar tax rate reduction. Hotel room tax revenue has been lowered by $2 million reflecting lower tourism stays. Partly offsetting these decreases is a $26 million increase for freehold mineral rights tax revenue as a result of higher energy prices.

Transfers from Government of Canada

Transfers from the Government of Canada are forecast to increase by $187 million to $2.6 billion. This reflects a $172 million increase in agriculture support, related to the Bovine Spongiform Encephalopathy (BSE) Recovery Program. The forecast for the Canada Health and Social Transfer has increased by $15 million reflecting more recent federal data.

Other Revenues

Other revenues are essentially unchanged at $4.9 billion. Alberta Treasury Branches has lowered its forecast by $19 million, in part due to potential increased risks in the agriculture sector. This reduction and smaller decreases in areas such as gaming revenue and Alberta Science and Engineering Research Endowment Fund investment income, are mostly offset by increases in liquor revenue, Sustainability Fund investment income, timber rentals and fees and other items.

Expense

Disaster and Emergency Assistance From the Sustainability Fund
A total of $545 million in disaster and emergency assistance is being provided from the Alberta Sustainability Fund to support agriculture and forest fire-fighting programs. In addition, $9 million in capital investment will be provided from the Sustainability Fund for constructing and equipping laboratory facilities to support enhanced food safety surveillance.

Agriculture, Food and Rural Development expense has been increased by $466 million to address BSE-related disaster assistance. This is partly offset by a $172 million increase in federal agriculture transfers.

The increased spending allows for the compensation of Alberta producers due to the temporary closure of borders to Canadian beef exports. Initiatives include a short-term federal-provincial program based on market prices, short-term fed cattle competitive bid and market adjustment programs to reduce the pressure on Alberta's beef markets, changes to the Alberta Disaster Assistance Loan and Alberta Farm Development Loan programs, enhancement of animal health surveillance and a cull cow and bull product development program.

Economic Development expense has been increased by $3.5 million for a market recovery strategy related to BSE. The program is aimed at enhancing buyer confidence and re-establishing Alberta's beef export markets. Agriculture, Food and Rural Development has also received $1 million in funding for their part in this $4.5 million program.

Sustainable Resource Development expense has been increased by $75 million to pay for increased forest fire-fighting costs.

In-Year Spending Initiatives From the Contingency Allowance
A $210 million Contingency Allowance was set aside in the budget for in-year spending increases and revenue reduction initiatives. The First Quarter Update commits $112 million from the Contingency Allowance. This consists of $107 million for in-year spending initiatives and $5 million for a reduction in cigar tax rates. In-year emergency and disaster assistance and changes in dedicated revenue and expense are not charged against the Contingency Allowance.

Health and Wellness expense has been increased by $22 million for facility operation and maintenance costs of health authorities. $19 million has been reallocated from the ministry to the ministries of Seniors and Human Resources and Employment for the increased costs of providing assistance to low-income residents due to long-term care rate increases. As a result, the ministry’s expense has increased by a net $3 million.

Human Resources and Employment expense has been increased by $2 million for the Assured Income for the Severely Handicapped (AISH) program. This funding, reallocated from Health and Wellness, will assist AISH recipients with long-term care costs.

Infrastructure and Learning expense have both been increased by $30 million from budget to fund increased facility operations and maintenance costs in schools and post-secondary institutions.

Seniors expense has been increased by $31 million from budget. $17 million has been reallocated from Health and Wellness to address the increased costs in the Seniors Benefit Program due to long-term care rate increases. In addition, $8 million has been provided for operations and maintenance costs of government-supported housing facilities, and $6 million for the Special Needs Assistance Program.
Solicitor General expense has been increased by $3.5 million to fund an organized crime initiative.

Finance expense has been increased by $11 million from budget. This includes $1 million to fund a review of automobile insurance, $3 million for higher pension liability funding and $7 million for dedicated revenue and expense increases of the Alberta Capital Financing Authority (ACFA) and Alberta Pensions Administration Corporation.

Debt Servicing Costs
Debt servicing costs have decreased by $70 million primarily due to the appreciation of the Canadian dollar against the U.S. dollar. This has lowered the cost of debt held in U.S. dollars.

Alberta Sustainability Fund

The Sustainability Fund balance at March 31, 2004 is forecast at $3.4 billion, a $1.2 billion increase from the budget estimate of $2.2 billion.
The Fiscal Responsibility Act requires non-renewable resource revenue above $3.5 billion to be transferred to the Sustainability Fund. This transfer has increased from $1.3 billion to $2.8 billion.
There are also net transfers of $240 million to the Fund as a result of:

$177 million increase in revenue (excluding non-renewable resource revenue, a $5 million revenue reduction initiative, and a $2 million reduction in dedicated revenue),
$70 million reduction in debt servicing costs,
less
$7 million increase in net cash requirements for capital spending and retained income of funds and agencies.

As permitted by the Fiscal Responsibility Act, emergency and disaster funding of $545 million for forest fire-fighting costs and agricultural assistance is being withdrawn from the Fund.

Cash Adjustments

Cash adjustments reflect differences between when revenue is accrued and cash is received, non-cash expenses, and transfers of cash not reported on the income statement.
Cash adjustments increase the $2.5 billion net transfer to the Sustainability Fund by $906 million, bringing the Fund’s forecast assets at the end of the year to $3.4 billion.
Cash adjustments primarily represent natural gas royalties that were accrued in 2002-03 but for which the cash was not received until 2003-04.
Other cash adjustments include the budgeted $21 million transfer to the Alberta Science and Engineering Research Endowment Fund; a $9 million cash transfer from the Sustainability Fund for capital investment in food safety surveillance laboratory facilities; and a $65 million foreign exchange valuation adjustment on debt denominated in U.S. dollars.

Capital Plan

Capital spending, including capital grants to local authorities and capital investment in provincial government-owned projects, is forecast at $1.677 billion. This is a $14 million net increase from the budgeted Capital Plan.

This increase consists of:

$24 million increase in ‘general government capital’, consisting of:

$13 million for the FireNet Telecommunications System (Sustainable Resource Development),

$9 million for constructing and equipping laboratory facilities to support enhanced food safety surveillance, funded from the Sustainability Fund (Infrastructure and Agriculture, Food and Rural Development), and

$2 million in net reallocations from operating spending to equipment/inventory purchases (various ministries).

$7 million increase in ‘other infrastructure programs’ for the Infrastructure Canada/Alberta Program.

$6 million increase in spending on pavement rehabilitation of the provincial highway network.

Pre-funding of $13 million of municipal transportation grants at the end of the 2002-03 fiscal year, which reduces the 2003-04 grant level by the same amount.

A decrease of $10 million for post-secondary facilities due to a change in the cash flows for the construction of the Health Innovation Centres.

Net Financial and Capital Assets

Net assets are forecast at $19.3 billion at March 31, 2004, including $10.5 billion of capital assets owned by the provincial government.
All of the $1.8 billion in accumulated debt that matures in 2003-04 will be repaid. Accumulated debt, net of cash set aside in the Debt Retirement Account, is forecast at $4.671 billion.
Pension obligations are forecast at $5.05 billion. These obligations are scheduled for elimination under a separate legislative plan and are not subject to the Fiscal Responsibility Act.

Assets, Liabilities and Net Assets

Net Financing Requirements

Fiscal Year Assumptions

Actual Results

For the first three months of 2003-04

Method of Consolidation

This financial summary is prepared on the same basis as used in Budget 2003.

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 the modified equity basis, the equity being computed in accordance with generally accepted accounting principles.

Basis of Financial Reporting

The consolidated fiscal summary reports revenue (including gains and losses from sale of capital assets), expense (including amortization of capital assets), and net revenue.

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 2002-03 figures have been restated where necessary to conform to 2003-04 presentation.

Consolidated Fiscal Summary^a

Expense

Go to:

2003-04 First Quarter Activity Report

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