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Second Quarter Fiscal Update
2003-04 Quarterly Budget Report

Released:  November 26, 2003

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UPDATING  ALBERTANS

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

TABLE OF CONTENTS

2003-04 Forecast

Actual Results

2003-04 Forecast

Highlights

  • Total revenue is $2.15 billion higher than estimated in Budget 2003. The increase primarily reflects higher non-renewable resource revenue and increased federal agriculture transfers.

  • Total expense is $1.12 billion higher than budgeted, reflecting:

    • $1.1 billion for agriculture and forest fire disaster/emergency assistance and an allocation for potential natural gas rebates (funded from the Sustainability Fund).
    • $169 million for in-year initiatives, including funding for Learning, social assistance programs and facility operations and maintenance costs (funded from the Contingency Allowance).
    • $145 million reduction in 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 billion higher than estimated in the budget.
  • The net assets of the Sustainability Fund, prior to reallocations, are $1.1 billion higher than estimated in the budget. Of the $1.1 billion increase:
    • $283 million has been retained in the Sustainability Fund to bring total assets of the Fund to the $2.5 billion target level.
    • $428 million has been allocated to the Capital Account. Details concerning the use of these funds will be provided in Budget 2004.
    • $428 million has been allocated for debt retirement. This reduces accumulated debt, net of cash set aside in the Debt Retirement Account, to $4.2 billion.

Revenue

Non-Renewable Resource Revenue

Non-renewable resource revenue is forecast at $6.7 billion. This is $1.9 billion higher than the budget estimate and $404 million higher than forecast in the First Quarter Fiscal Update.

The increase is due mainly to higher-than-estimated oil and natural gas prices. This is partly offset by the strengthening of the Canadian dollar relative to the U.S. dollar and lower-than-estimated natural gas production in Alberta.

Natural gas royalties are forecast at $4.8 billion, up $1.3 billion from the budget estimate. Natural gas prices are expected to average Cdn$5.15 per thousand cubic feet (mcf) for the fiscal year. This is $1.10 higher than budgeted and 15 cents higher than forecast in the First Quarter Fiscal Update. The price increase is primarily due to continued concerns over North American supply.

Total oil royalties are forecast at $1 billion, nearly $400 million higher than budget. The oil price is expected to average US$27.50 per barrel for the year. This is US$4.20 higher than the budget estimate and US$2.50 higher than forecast in the First Quarter Fiscal Update.

The revised price forecast reflects the continuing problems in re-introducing Iraqi production and recent OPEC moves to reduce production quotas.

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 $3.2 billion.

Personal Income Tax Revenue

Personal income tax revenue is forecast to be $400 million lower than estimated in the budget. Based on updated federal information, Alberta’s estimated personal income tax revenue for the 2002 tax year has been reduced by $223 million. This also reduces the forecast of 2003 tax year assessments, resulting in a combined $400 million decline in 2003-04 personal income tax revenue from the budget estimate.

Other Tax Revenue

Tax revenue from other sources is $26 million higher than budgeted, primarily due to a $28 million increase in freehold mineral rights tax revenue due to higher energy prices.

Transfers from Government of Canada

Transfers from the Government of Canada are forecast to be $565 million higher than budgeted and $378 million higher than forecast in the First Quarter Fiscal Update. The increase from budget reflects:

  • $407 million in federal agriculture transfers primarily related to the BSE Recovery Program.
  • $158 million net increase in Canada Health and Social Transfer (CHST) and other federal transfers. CHST revenue increases when Alberta's income tax revenue declines.

The second quarter forecast does not include the one-time federal health transfer that may be received in 2004. Details concerning the amount and timing of this supplement remain uncertain.

Other Revenues

Total revenue from other sources is $35 million higher than budgeted. Major changes from budget include:

  • $17 million increase in net income of the Alberta Gaming and Liquor Commission.
  • $15 million increase in investment income on higher-than-budgeted balances in the Sustainability Fund, Debt Retirement Account, and Capital Account (Capital Account income is included in “Other Investment Income”).
  • $21 million increase in revenue due to reversal of an Alberta Government Telephones Commission provision.
  • $9 million increase in interest income under the Credit Union Stabilization Agreement due to higher credit union deposit growth.
  • $17 million reduction in net income of Alberta Treasury Branches.
  • $11 million reduction in timber royalties and fees.
  • $1 million net increase in other revenues.

Expense

Funding From the Sustainability Fund
Disaster/Emergency Assistance – $918 million in disaster/emergency assistance is being provided from the Sustainability Fund to support agriculture, forest fire-fighting and disaster programs, an increase of $373 million from the first quarter.

  • Agriculture, Food and Rural Development expense has been increased by $794 million from budget to address BSE-related disaster assistance. Partly offsetting this is a $407 million increase in federal agriculture transfers. Increased funding provides compensation to Alberta producers affected by the temporary closure of borders to Canadian beef exports.
  • Economic Development expense, as reported in the First Quarter Fiscal Update, has increased by $3.5 million for a BSE market recovery strategy.
  • Municipal Affairs expense has increased by $7 million for three disaster recovery programs.
  • Sustainable Resource Development expense has increased by $113 million from budget and $38 million from first quarter for forest fire-fighting costs.

Natural Gas Rebates – $181 million has been allocated for potential natural gas rebates during the 2003-04 winter period. This assumes rebates will be paid in 3 of 5 eligible months. If the price the majority of the regulated utilities charge does not exceed the trigger price of $5.50 per gigajoule in an eligible month, rebates will not be paid. Rebates are expensed by the Ministry of Infrastructure.

Funding From the Contingency Allowance
$210 million was budgeted in the Contingency Allowance for in-year non-emergency initiatives. $174 million has been committed – $112 million in the first quarter and a further $62 million in the second quarter. In-year emergency/disaster assistance, natural gas rebates, changes in dedicated revenue and expense, and increases offset by lapses in budgeted program expense are not charged against the Contingency Allowance.

Learning expense has been increased by $56 million from budget. As noted in the First Quarter Fiscal Update, $30 million was provided for operations and maintenance costs of post-secondary institutions. In the second quarter, support for school boards in the 2003-04 fiscal year has been increased by $40 million primarily to address some recommendations of Alberta’s Commission on Learning. $15 million also has been provided to support additional entry spaces at post-secondary institutions. These increases are partly offset by $29 million in lapses, primarily related to the provision for student loans and teachers’ pensions.

Seniors expense has been increased by $37 million from budget. As noted in the First Quarter Fiscal Update, $31 million was provided for seniors programs and operations and maintenance costs of housing facilities. A further $6 million has been provided in the second quarter for the Special Needs Assistance Program.

Human Resources and Employment expense has increased by $32 million. A $2 million increase was provided for the Assured Income for the Severely Handicapped program in the first quarter. In the second quarter, $30 million has been added for caseload and cost increases in assistance programs.

Infrastructure expense was increased by $30 million in the first quarter for operations and maintenance costs of schools. In the second quarter, $1 million has been added for seniors lodges, and $181 million is forecast to be transferred from the Sustainability Fund for natural gas rebates.

Municipal Affairs expense has increased by $5 million for assistance to local governments for energy efficiency projects and for the monitoring and warning system for Turtle Mountain. This is in addition to the $7 million provided for disaster assistance.

Health and Wellness expense has increased by $1 million from budget. As noted in the First Quarter Fiscal Update, increases for facility operations and maintenance costs of health authorities are mostly offset by reductions in other program areas.

Debt Servicing Costs
Debt servicing costs have decreased by $145 million from budget primarily due to the appreciation of the Canadian dollar. This has reduced the cost of debt held in U.S. dollars.

Alberta Sustainability Fund

Transfers to (from) Sustainability Fund

  • 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 $3.2 billion, $1.9 billion higher than estimated in the budget.

  • The Fiscal Responsibility Act allows withdrawals from the Fund to pay for emergencies, disasters and rebates under the Natural Gas Price Protection Act. These withdrawals are forecast at $1.1 billion.

  • There are also net transfers of $373 million to the Fund consisting of:
    • $232 million increase in revenue (excluding non-renewable resource, $1 million decrease in dedicated revenue and expense and $5 million revenue reduction initiative),
    • plus $145 million reduction in debt servicing costs,
    • less $4 million increase in the net cash requirements for capital spending and retained income of funds and agencies.

Cash Adjustments

  • Cash adjustments reflect the differences between accrued revenue and cash receipts, non-cash expenses, and transfers of cash not reported on the income statement.

  • Cash adjustments increase the net transfers to the Sustainability Fund by $880 million, reflecting primarily natural gas royalties that were accrued in 2002-03 but for which cash was not received until 2003-04.

Assets of Sustainability Fund

  • Net assets of the Sustainability Fund, prior to reallocations, are forecast at $3.4 billion. This is $1.1 billion higher than estimated in the budget.

  • The Fiscal Responsibility Act allows the reallocation of Sustainability Fund assets to other balance sheet improvements once the Fund reaches its target level of $2.5 billion.

  • Based on the second quarter forecast, $856 million will be allocated at the end of the fiscal year. The Debt Retirement Account and the Capital Account will each receive $428 million, leaving $2.5 billion in the Sustainability Fund.

 

Capital Plan

  • Capital spending, including capital grants to local authorities and capital investment in provincial government-owned projects, is currently forecast at $1.684 billion. This is $8 million higher than the budgeted Capital Plan.

  • Changes in the Capital Plan include:
    • General Government Capital – $28 million increase including:
      • $13 million for the FireNet Telecommunications System (Sustainable Resource Development).
      • $9 million for constructing and equipping laboratory facilities to support enhanced food safety surveillance (Infrastructure and Agriculture, Food and Rural Development, funded from the Sustainability Fund).
      • $4 million for development of a new Apprenticeship, Trades and Occupations Management System (Learning).
      • $2 million in other changes, including net transfers from operating spending to equipment and inventory purchases.
    • Provincial Highway Network – $11 million increase for pavement rehabilitation and construction.
    • Municipal Transportation Grants – $13 million reduction due to pre-funding of 2003-04 grants in 2002-03.
    • Post-secondary Facilities – $10 million reduction due to revised project schedules for the construction of Health Innovation Centres funded from the Alberta Heritage Foundation for Medical Research Endowment Fund.
    • Water and Wastewater Management – $7 million reduction due to revised project schedules.
    • Other Infrastructure – $4 million decrease mainly due to a $10 million deferral for Alberta SuperNet, offset partly by a $7 million increase for the Infrastructure Canada/Alberta Program.
    • Community Facilities and Housing – $3 million in increases.
  • Further details on Capital Plan spending by ministry are reported on below.

 

Net Financial and Capital Assets

  • Net Assets – The government of Alberta’s net assets are now forecast at $19.2 billion as of March 31, 2004. This includes capital assets of $10.5 billion.

  • Pension Obligations – Pension obligations are forecast at $5.1 billion. They are scheduled for elimination under a separate legislative plan and are not subject to the Fiscal Responsibility Act.

  • Accumulated Debt – Accumulated debt, net of cash set aside in the Debt Retirement Account, is forecast at $4.2 billion as of March 31, 2004. This is a $538 million reduction from March 31, 2003. The reduction reflects the $428 million allocation to the Debt Retirement Account and a $110 million reduction in the value of debt held in U.S. dollars due to the appreciation of the Canadian dollar.

Assets, Liabilities and Net Assets

Net Financing Requirements

Fiscal Year Assumptions

Capital Investment and Amortization

Capital Grants to Local Authorities and Other Infrastructure Supporta

Actual Results

For the first six 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 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 Summarya

Expense

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2003-04 Second Quarter Activity Report

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