2006-07 Quarterly Budget Report: Second Quarter Fiscal Update Released:  November 15, 2006 Table of Contents Download this document as pdf Updating Albertans 2006-07 Forecast: Highlights and Fiscal Summary Revenue - Table Expense - Tables: - Expense Summary - Expense by Ministry Alberta Sustainability Fund - Table Capital Plan - Table Net Financial and Capital Assets - Tables: - Balance Sheet - Capital Account - Assets, Liabilities and Net Assets Other Tables - Net Financing Requirements - 2006-07 Fiscal Year Assumptions - Capital Investment and Amortization - Capital Grants to Local Authorities and Other Infrastructure Support Actual Results - Tables: Consolidated Fiscal Summary Expense Go to Second Quarter Activity Report Go to Second Quarter Fact Card (pdf)

The Second Quarter Fiscal Update consists of two parts – the updated 2006-07 forecast and the actual results for the first six months of the fiscal year (April 1 to September 30, 2006).

• Surplus. Forecast at $5.4 billion, an increase of $1.3 billion from budget and $1.2 billion higher than in the First Quarter Fiscal Update.
  
  

• Revenue. Forecast at $35.1 billion, an increase of $2.7 billion from budget and $1.2 billion higher than the first quarter forecast. The increase is mainly due to higher income tax revenue and investment income.
  
  

• Expense. Forecast at $29.7 billion, an increase of $1.4 billion from budget and $47 million higher than the first quarter forecast. Changes include:

  • Capital grants – $772 million increase from budget primarily for schools, post-secondary institutions, health, public transit, housing and cost escalation of projects ($233 million increase from first quarter).
  • Operating – $216 million net increase from budget mainly for health and education ($34 million increase from first quarter).
  • Disaster/emergency assistance – $517 million increase from budget for agriculture, wildfires, floods and mountain pine beetle infestations ($1 million increase from first quarter).
  • Natural gas rebates – $109 million decrease from budget ($211 million decrease from first quarter).
    
    
• Capital Plan. Strong financial results have allowed a $2.7 billion increase in capital commitments over the original 2006-09 Capital Plan. This includes an increase of $895 million in 2006-07 ($772 million in capital grants and $123 million in capital investment) and an increase of $1.8 billion in future years.
  
  
• Sustainability Fund. Allocations from the Fund include $2.5 billion to the Heritage Fund, endowments and other funds, and $1.5 billion to the Capital Account for the future costs of approved capital commitments. After these allocations, the Fund is forecast at $5.5 billion. This is $3 billion higher than the minimum target level.

Further details are provided in the Alberta Sustainability Fund section of this document.

NON-RENEWABLE RESOURCE REVENUE

Non-renewable resource revenue is now forecast at $11.6 billion, an increase of $197 million from budget but down $334 million from first quarter. Higher-thanbudgeted revenue from oil royalties and land sales has been offset by lower revenue from natural gas royalties.

Total oil royalties are forecast at $3.9 billion, $1.3 billion higher than the budget estimate and $113 million higher than first quarter forecast. Oil prices are forecast to average US$64.67 per barrel for the fiscal year. This is US$14.67 higher than the budget estimate and US$1.17 higher than the first quarter forecast.

Year-to-date (April to October) oil prices have averaged about US$69 per barrel but are expected to average only about US$60 per barrel for the remainder of the fiscal year.

Natural gas royalties are forecast at $5.4 billion, $1.7 billion less than budgeted and $761 million lower than the first quarter forecast. Natural gas prices are forecast to average Cdn$5.75 per gigajoule for the fiscal year, a decrease of Cdn$1.75 from budget and Cdn75’ from the first quarter forecast. Year-to-date (April to October) natural gas prices have averaged about Cdn$5.45 per gigajoule. For the rest of the fiscal year, prices are expected to average over Cdn$6.00 per gigajoule.

Revenue from bonuses and sales of Crown leases is forecast at $2.2 billion, $704 million higher than budgeted and $373 million higher than the first quarter forecast. The increase is due to higher-than-expected oil sands lease sales.

The government has announced the ending of the Alberta Royalty Tax Credit (ARTC) effective January 1, 2007. ARTC payments are forecast at $165 million, $63 million higher than budgeted. The increase reflects an accrual for 2006 claims that would have been reported in 2007-08.

The Fiscal Responsibility Act requires non-renewable resource revenue above $5.3 billion be transferred to the Sustainability Fund. This transfer is forecast at $6.3 billion.

TAX REVENUE

Personal income tax revenue is forecast at $7.4 billion, up $1.4 billion from budget and $688 million from first quarter.

Updated assessment data for the 2005 tax year indicate a positive prior years’ adjustment of $582 million. The higher 2005 base and stronger 2006 personal income growth also increase the current-year forecast.

Corporate income tax revenue is forecast at $2.8 billion, up $573 million from budget and $100 million from the first quarter forecast, due to a stronger outlook for corporate profits.

Other tax revenue is forecast at $3.4 billion, $40 million higher than budget and $25 million higher than first quarter. Increases in revenue from tobacco, fuel and insurance taxes and the tourism levy, are partly offset by a decrease in the freehold mineral rights tax.

TRANSFERS FROM THE GOVERNMENT OF CANADA

Transfers from the Government of Canada are forecast at $3.2 billion, $182 million lower than budgeted but $84 million higher than the first quarter forecast.

Health transfers and the Canada Social Transfer are $411 million lower than budgeted, reflecting the impact of higher provincial income tax revenue on cash transfers. Other transfers are $229 million higher than budgeted due mainly to federal transfers for public transit, housing and post-secondary infrastructure.

INVESTMENT INCOME

Investment income is forecast at $2.2 billion, up $470 million from budget and $466 million from the first quarter forecast.

Heritage Fund and endowment fund income is $289 million higher than budgeted due to higher realized capital gains. Other investment income is forecast to be $181 million higher than budgeted mainly due to higher asset balances and higher short-term interest rates.

OTHER REVENUE

Other revenue is forecast at $4.6 billion, up $254 million from budget and $168 million from the first quarter forecast. Changes from budget include:

• $153 million increase in gaming and liquor revenue, mainly from higher volumes due to population and income growth.
• $38 million decrease in revenue from timber rentals and fees due to lower prices and a higher exchange rate.
• $139 million increase in other revenue.

TOTAL EXPENSE

• Total expense is $1.4 billion higher than the budget estimate. Changes include:
  • $772 million in increased capital grants.
  • $517 million in disaster/emergency assistance provided from the Sustainability Fund.
  • $216 million net increase in operating expense, of which $194 million is for in-year initiatives drawn from the Contingency Allowance.
  • $109 million decrease for lower natural gas rebates from the Sustainability Fund.
  • $10 million decrease in debt servicing costs.

SUSTAINABILITY FUND

Disaster/Emergency Assistance – Total assistance of $517 million: $261 million for agriculture assistance, $231 million for forest fire-fighting costs, $20 million for survey and control of mountain pine beetle infestations and $5 million for flood disasters.

Natural Gas Rebates – $253 million in rebates are forecast to be paid, a $109 million decrease from the budget estimate. Rebate levels are now expected to be $1.50 per gigajoule in the five months November to March, with no rebates in October.

CAPITAL GRANTS / CAPITAL ACCOUNT

Funding for capital grants has been increased by a net $772 million from budget. This includes:

• $572 million in additional grants funded from the Capital Account, primarily for cost escalation of approved projects, additional school projects, health equipment and Water for Life projects.
• $225 million for in-year federal transfers for public transit, post-secondary institutions, and affordable and off-reserve aboriginal housing (dedicated revenue/expense changes).
• Less a $25 million lapse in budgeted capital grants primarily due to rescheduling of projects. This lapse has been used to provide increased operating funding for Advanced Education, and Seniors and Community Supports.

FUNDING FROM THE CONTINGENCY ALLOWANCE

$300 million was set aside in the budget for in-year, non-emergency operating spending initiatives. A net $194 million has been allocated primarily for higher health and education expense.

MINISTRY EXPENSE CHANGES

Advanced Education – $131 million increase. Includes $118 million net increase in capital grants for cost escalation and project funding and net $13 million operating increase to address matching contributions at post-secondary institutions.

Agriculture, Food and Rural Development – $270 million increase. This includes $261 million in agriculture disaster funding, $5 million for wastewater infrastructure and $5 million for bioenergy initiatives, partly offset by $1 million in other net decreases.

Education – $302 million increase. This includes $239 million in capital grants for school maintenance and renewal, cost escalation of approved projects, modular classrooms, new schools and preservation projects; $62 million for operating support to schools; and $1 million in other increases.

Health and Wellness – $264 million increase. This includes $152 million for medical equipment capital grants, $31 million for auxiliary nursing salary adjustments and $81 million for health authority operations.

Infrastructure and Transportation – $71 million net increase. This includes a net $187 million in capital grants primarily for public transit, cost escalation of approved capital projects, and Water for Life regional water system planning; $109 million decrease for natural gas rebates; and a $7 million net decrease in other expenses.

Municipal Affairs – $24 million increase. This includes $15 million in capital grants for petroleum storage tank site remediation and other projects, $5 million for 2006 flood disaster assistance, $4 million for costs related to 2005 flood disasters.

Seniors and Community Supports – $49 million net increase. This includes a $51 million increase for housing and other capital grants, $8 million for a homelessness initiative and a $2 million increase for the rent supplement program. These increases are partially offset by a $12 million decrease in AISH costs.

Sustainable Resource Development – $249 million net increase. This includes $251 million for forest firefighting and mountain pine beetle infestation costs, less $2 million in transfers to capital investment.

Other ministries – There is a net $36 million increase from budget including additional funding for the Alberta Film Development Program and energy and water research initiatives.

Net Financial and Capital Assets

• Net Assets – Net assets at March 31, 2007 are forecast at $39.7 billion. This includes capital assets of $12.7 billion.
  
  

• Capital Account – Capital Account assets are forecast at $5.8 billion, an increase of $1.5 billion from March 31, 2006. The increase reflects funding set aside for the cost of increased capital commitments in future years.
  
  

• Accumulated Debt/Debt Retirement Account – Sufficient funds have been set aside in the Debt Retirement Account to pay for remaining accumulated debt as it matures.
  
  

• Heritage Fund – The book value of Heritage Fund external assets is forecast at $15 billion, an increase of $1.6 billion from March 31, 2006. The increase includes $1.3 billion in a deposit and inflation proofing, a $250 million deposit for the advanced education endowment and repayment of ASHC debt.
  
  

• Endowments and Other Funds – Allocations have also been made to endowments and other funds. These include the Alberta Cancer Prevention Legacy Fund, the Energy Innovation Fund, the Medical Research Endowment Fund, the Science and Engineering Research Endowment Fund and the Scholarship Fund.