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CONTENTS Victoria, British Columbia
Canada V8W 1G1
P: 250.419.6100
Auditor General’s Comments 3 F: 250.387.1230
www.bcauditor.com
Report Highlights 4
The Honourable Linda Reid
Summary of Recommendations 5 Speaker of the Legislative Assembly
Province of British Columbia
Response from the Ministry of Finance 6 Parliament Buildings
Victoria, British Columbia
Executive Summary 7 V8V 1X4
Appendix A:
Reporting Examples from Other Jurisdictions 31
Appendix B:
Indicators of Financial Condition Reported
by B.C. For Year Ended March 31, 2014 33
AUDITOR GENERAL’S
COMMENTS
Fiscal Sustainability means government can provide
services and meet financial commitments – both now and in the future.
I wish to thank the staff at Treasury Board and the Ministry of Finance for
their cooperation and contribution to this report.
British Columbia
NEEDS LONG-TERM
65+
OUTLOOK
LESS
WORKERS
= less economic
RISKS Aging
growth
to B.C.’s long population,
term fiscal healthcare costs,
sustainability climate change, AGING
infrastructure, POPULATION
= greater costs
etc…
for health
care/services
1 report publicly on its assessment of the province’s long-term fiscal sustainability, including
the reporting of relevant targets and results. This assessment should inform the annual
budget process.
Government acknowledges the importance of long-term fiscal sustainability planning to ensure the
programs and services that the citizens of B.C. have come to rely on can continue to be provided in a
sustainable way in the future, without increasing debt obligations on future generations or increasing tax
burdens to manage the impact of an aging population, rising health care costs, climate change, and the
cost of maintaining and renewing infrastructure, among others.
Government agrees with the recommendation in the report and commits to working towards additional
public reporting on long-term fiscal sustainability, beyond what is currently reported (i.e. health care
sustainability and strategies for growing the economy).
Through the annual budget process, the B.C. government reports its budgeted and forecasted revenues and
the cost of delivering programs for the next three years. Government also reports on the expected trend in
the affordability of debt over the next three years. By publishing this information, government informs, and
is accountable to, taxpayers, for its fiscal management over a medium term timeframe (three years). But are
there risks to government maintaining present policies and programs over the longer term? In 20 years, will
government still be able to pay for the services we currently depend on without significantly increasing taxes or
increasing debt in an unsustainable manner?
There has been growing recognition internationally very complex and citizens expect that the stability of
of the importance of a long-term outlook. Guidance government services will be protected. Monitoring
on, and the practice of, governments reporting on long-term fiscal sustainability helps a government
long-term fiscal sustainability has evolved significantly to better respond to long-term pressures and risks in
during the past two decades. This shift is due to a gradual manner, instead of being forced to adopt
a recognition that there are significant risks to sudden and disruptive policy changes.
government finances, which are expected to intensify,
in the decades ahead. Long-term reporting is still in its Population aging, a risk common to advanced
infancy in many jurisdictions, including most of the economies worldwide, is expected to significantly
other Canadian provinces. However, given the risks impact both government revenues and program costs
emerging on the horizon, an increased focus on long- in the future. As a population ages, the proportion
term fiscal sustainability is becoming more and more of the population that is of working age decreases.
important with each passing year. This is expected to slow economic growth and, with
it, government’s ability to generate revenues. At the
Why is a longer-term outlook important? For the same time, population aging will result in increasing
same reason you look ahead while you drive a car or pressure on government’s overall cost of delivering
walk through a crowded market. You need to see far services. Fiscal pressure related to the delivery of
enough ahead to avoid hazards. And the slower you health care, in particular, is expected to intensify
are to react and adjust, the further ahead you need to further in the coming decades, due to population
look. For a government, effectively responding to risks aging and other inflationary pressures. Health care
emerging in the future requires a long-term outlook. costs have already been growing as a proportion of
This is because adjustments to government programs government’s overall spending for some time. In 1999,
generally take a long time – government programs are health care costs made up 30% of the total expenses
of government, and by 2014 they had grown to 41%. Public reporting on long-term fiscal sustainability
There are also other significant risks to long-term is important not only to inform the decisions of
fiscal sustainability, including the effects of climate legislators, but also to inform citizens of what
change and the future cost of maintaining and government is doing to ensure sustainable government
renewing aging infrastructure. programs. This reporting should include projections
of future cash inflows and outflows, and a discussion
We found that the B.C. government reports on most of the important elements of long-term fiscal
aspects of its current financial health and reports sustainability. Government’s projections should also
forecasted financial results over the medium term include a discussion of the principles, assumptions
(three years). These reports indicate that the B.C. and underlying methodologies used, and be
government’s financial health is relatively strong prepared based on current policies and future
compared to the other provinces. economic assumptions.
Government does not report on its overall long-term Government should report on long-term fiscal
fiscal sustainability, but it reports on certain risks and sustainability frequently enough so that the
strategies relevant to long-term fiscal sustainability. It information remains relevant. Also, reporting should
reports on strategies to maintain a sustainable health tie directly into the annual budget process, and link
care system and on measures that have, or will, be to other budget practices and procedures, including
implemented to control health care cost escalation. legislated budgetary requirements. This is to ensure
Government also reports on strategies for growing the government gives adequate attention to the potential
economy in the future. long-term fiscal consequences of its current policies.
the topic of fiscal sustainability We concluded our study in March 2015. We reviewed
key principles to effectively report on, and fiscal sustainability publications and guidance,
manage, fiscal sustainability reporting practices in other jurisdictions, and the
province’s current reporting practices related to fiscal
risks to B.C.’s fiscal sustainability
sustainability. When looking at risks specific to B.C.,
reporting guidance and practice in other we engaged economists as advisors. We did not audit
jurisdictions the completeness or accuracy of the government
how B.C. currently reports on fiscal reports we reviewed, and we did not assess internal
sustainability risks and mitigation strategies monitoring and risk management processes related to
fiscal sustainability.
1
International Public Sector Accounting Standards Board
(IPSASB). Recommended Practice Guideline: Reporting on the Long-
Term Sustainability of an Entity’s Finances. July 2013.
2
In the year-ended March 31, 2014, B.C. received $4.3 billion
in health care funding from the federal government, which
represented about one quarter of B.C.’s total health care expenses
of $17.9 billion. Report of the Auditor General of Canada – Fall 2012
3
4
Department of Finance Canada: Update of Economic and
Fiscal Projections. November 2014.
Exhibit 1: B.C. old age dependency ratio vs. population growth (actual to 2013 and projection to 2041)
3.5% 45%
3.5% 45%
40%
3.0%
40%
35%
3.0%
2.5%
35%
30%
2.5%
growthgrowth
2.0% 30%
ratio ratio
25%
age depency
population
2.0% 25%
1.5% 20%
depency
population
20%
PercentPercent
1.5% 15%
Old ageOld
1.0%
15%
10%
1.0%
0.5% 10%
5%
0.5%
0.0% 5%
0%
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 2026 2031 2036 2041
0.0% 0%
Year
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 2026 2031 2036 2041
Old age dependency ratio Year Population growth
Source: Prepared by Office of the Auditor General of British Columbia using BC Stats data
Exhibit 2: B.C.’s health care expenses as a percentage of GDP from 1981 to 2013 with trend line
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Year
Health as a % of GDP Trend line
Source: Prepared by Office of the Auditor General of British Columbia using StatsCan B.C. Economic Accounts Data and expenditure data
from the Canadian Institute for Health Information
Exhibit 3: Health care expenses as a percentage of total operating expenses by fiscal year ended March 31st
(actual to 2014 and planned to 2018)
44%
42%
40%
38%
36%
34%
32%
30%
1999 2001 2003 2005 2007 2009 2011 2013 2015 2016 2017 2018
Year
Health care expenses as a % of total operating expenses
Source: Prepared by Office of Auditor General of British Columbia using data provided by the B.C. Ministry of Finance
8
Preparing for Climate Change – British Columbia’s Adaptation
Strategy Feb 2010
G U I D A N C E O N F I S CA L THE INTERNATIONAL
S USTA I N A B I LI T Y MONETARY FUND
REPO RT I N G The IMF is an organization of 188 countries, working
to foster global monetary cooperation, secure
Over the past few decades, there has been growing
financial sustainability, facilitate international trade,
recognition of the importance of a long-term
promote high employment and sustainable economic
outlook, and both guidance on, and the practice of,
growth and reduce poverty around the world. The
reporting have evolved considerably. Guidance on
IMF supports its member countries by providing
fiscal sustainability reporting is discussed below and
policy advice, research, forecasts and analysis, and
additional information on reporting practices in other
by providing loans to countries to help overcome
jurisdictions is included in Appendix A.
economic difficulties.
In 2002, both the International Monetary Fund (IMF)
and the Organization for Economic Co-operation
and Development (OECD) published guidance ORGANIZATION FOR
that recommended a longer-term outlook. OECD ECONOMIC CO-OPERATION
recommended that governments prepare a long-term AND DEVELOPMENT
report at least every five years to assess the budgetary The OECD’s mission is to promote policies that
implications of demographic change and other will improve the economic and social well-being of
potential developments over the next 10 to 40 years.9 people around the world. They undertake studies and
IMF similarly recommended the use of longer-term perform analyses to predict future trends that affect
projections to assess sustainability.10 Since 2002, IMF, businesses and governments. The OECD provides
OECD and other organizations have continued to a forum in which government can work together to
develop guidance and the practice of publishing fiscal share experiences and seek solutions to common
projections and reporting on long-term fiscal risks has problems and understand what drives economic,
increased significantly.11 social and environmental change.
9
OECD. Best Practices for Budget Transparency. 2002.
10
IMF. Assessing Sustainability. 2002.
OECD October 2009 Policy Brief – The Benefits of Long-term
11
Fiscal Projections.
Exhibit 4: The IMF’s Fiscal Transparency Code will have four pillars of practice
Initiative. 2014.
15
The only indicator recommended by PSAB which is not
reported on is the trend in the ratio net book value of capital assets
to the cost of capital assets. This is an indicator of how investment
in capital assets compares with the depreciation (deterioration) of
capital assets.
Exhibit 5: Ratio of taxpayer-supported debt to GDP and total debt to GDP (actual to 2014 and planned to 2018)
30%
25%
Provincial debt as a % of GDP
20%
15%
10%
5%
0%
Actual Actual Actual Actual Actual Actual Planned Planned Planned Planned
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Compiled by the Office of the Auditor General of British Columbia. Actual results as reported in the public accounts, and planned
results as reported in the Budget and Fiscal Plan 2015/16 -2017/18.
statements, government reported that a 1% change affordability of debt over the long term, or if significant
in interest rates would impact annual debt servicing changes to policies and programs will be required in
expense by $139 million. the future to maintain fiscal balance.
17
Budget and Fiscal Plan 2015/16 – 2017/18 – Table A12
18
Budget and Fiscal Plan 2015/16 – 2017/18 – Table A10
19
Budget and Fiscal Plan 2015/16 – 2017/18
Exhibit 6: Factors beyond the annual budget surplus or deficit that impact long-term debt affordability
The growth of GDP determines the affordability of debt as it corresponds with growth
in government’s ability to generate revenues. For example, if GDP growth is low the
GDP growth affordability of debt may decline even if government is balancing budgets annually. And
conversely, if GDP growth is high, the affordability of debt may improve, even when
government is experiencing deficit annual budgets.
Investment in capital infrastructure (and other long-lived assets) is not fully reflected in
the annual budgetary balance. For example, if government purchases a building with a
life of 50 years, it would pay for the asset in year one, but the expense would be reflected
in the annual budgets over 50 years. The result is that debt can rise significantly from
Capital Investment capital investment, while government is still able to maintain a balanced annual budget.
For the year ended March 31, 2014, the B.C. government achieved an annual surplus,
but total debt (net of sinking fund investments) increased by $4.9 billion (8.9% over the
previous year) due largely to capital investment.
Demographic change
As discussed in this report, an aging population impacts both economic growth (because
and other long-term
the number of people working decreases) and program costs over the longer term.
risks
A 2005 study of Canadian fiscal forecasting sustainability risks should also consider if balanced
undertaken at the request of the Federal Finance budget legislation, in its current form, results in the
Minister also concluded that if annual balanced outcomes intended.
budget rules were strictly adhered to, it could require
adjustments during economic downturns that While B.C. has a legislated strict balanced budget
would exacerbate economic weakness.21 This report requirement, this legislation was adjusted to allow
recommended that government consider adopting a deficit spending for the years ended March 31, 2010
fiscal rule, other than an annual balanced budget rule, through to 2013. As government has committed that
that instead would increase the focus on the medium these deficits will be repaid from future surpluses,
to long-term. Options discussed included achieving a it is, in effect, managing to a balanced budget over a
balanced budget over a longer period, encompassing longer period to accommodate the economic cycle.
the economic cycle and a targeted maximum ratio of As discussed earlier, government also publishes a
debt to GDP. targeted ratio of debt to GDP for the next three years
in the budget and fiscal plan. These controls are good
These studies illustrate that an annual balanced budget tools for managing financial health over the medium
rule can shift the focus away from long-term risks term. However, they are not sufficient to ensure risks
and can have negative implications for fiscal policy emerging over the longer term are being managed
and financial management. Therefore, government’s effectively.
assessment and management of long-term fiscal
In October 2013, the speech from the Throne opening Encourages disposal of public assets – balanced
the second session of the 41st Parliament announced the budget legislation increases the likelihood that assets are
federal government’s intention to introduce balanced disposed of at times and at prices that are not optimal. The
budget legislation. In September 2014, the PBO published PBO referenced studies that found governments facing
the report Federal balanced budget legislation: Context, potential non-compliance with balanced budget laws
impact and design to help Parliamentarians assess the value were more likely to sell public assets. Asset sales to achieve
of balanced budget legislation and to inform options to budgetary requirements could lead to a loss in economic
increase chances of success. and social welfare, if maintaining public ownership, or
holding out for higher prices, would be more valuable
The PBO reported that while there can be benefits,
than immediate budget room. One of the principles for
restricting a government’s fiscal discretion by law can have
constructive legislation recommended by the PBO is that
many costs and unintended consequences that outweigh
windfalls from asset sales and shortfalls from unanticipated
potential benefits. In addition to the implications of a
expenses such as natural disasters should be excluded from
balanced budget requirement for managing economic
the budgetary balance when estimating compliance with
cycles and fiscal sustainability (as described in this report),
legislation.
the PBO’s study made other observations which we believe
are relevant to British Columbia, where balanced budget RECENT OBSERVATIONS IN B.C.
legislation is in place.
The B.C. government was required to return to a balanced
Shifts the composition of spending and revenues budget for the year-ended March 31, 2014, and one of the
and encourages creative accounting – compliance strategies for achieving a balanced budget (as described in
with balanced budget legislation can shift spending and the fiscal 2014 budget) was the sale of surplus properties,
the tax mix toward programs that offer quick budgetary resulting in the recognition of revenues from gains (a gain
successes in the short term, and away from the financially equals proceeds less cost). For the year ended March 31,
and socially optimal allocation. The effects of reconciliation 2014, government reported an annual surplus of $353
measures, such as increases in taxes or spending reductions, million, which included revenues of $601 million from the
could have economic or social consequences that outweigh sale of assets. In the previous year, the revenues reported
the short-term benefit of balancing the budget. Balanced from the sale of assets were only $13 million. This means
budget legislation can lead to a bias that shifts the allocation that government would not have achieved a balanced
from operating expenses to capital expenditure where budget without the additional revenues from the increased
the budgetary impact is deferred into the future. It can sale of assets. The sale of surplus assets continued to be a
also influence decisions to structure programs using measure to help balance the budget for fiscal 2015. Budget
government business enterprises, loans and loan guarantees 2015 also announced that, in order to provide more funding
or alternative service delivery with private sector partners. certainty, $107 million in grants for local governments and
These are decisions that should be based entirely on other recipients would be accelerated into the fiscal 2015
commercial fundamentals, rather than the impact of the year with corresponding reductions in subsequent years.
USA (Office of
Budget and Accounting Fiscal Year 2015 Analytical Perspectives:
Management 75 years Annually
Act of 1921 Budget of the US Government (2014)
and Budget)
REPO RT I N G B Y S U B - N ATI O N A L GO V E R N M E NT S
Ontario’s Long-Term Report on the Economy is an There has been more interest in long-term planning
assessment of the province’s fiscal and economic by Australian states than in other commonwealth
environment and is prepared every four years by the countries. The following states have released fiscal
Ministry of Finance in accordance with the Fiscal sustainability related reports:
Transparency and Accountability Act. The report’s
demographic and economic projections highlight Queensland released the report Economic and
the anticipated challenges and opportunities that will Fiscal Challenges in 2014 which looks ahead
affect the province over the next 20 years. 10 years at challenges in the states’ financial
position
The latest report, published in 2014, identifies New South Wales releases a fiscal responsibility
demographic and economic trends which illustrate report every five years, the latest release was
that labour force and economic growth are expected in 2012 (NSW Long-Term Fiscal Pressures
to slow. These trends include: an aging and moderately Report) which looks ahead 40 years
growing population, increased global competition,
The reports listed above discuss state specific
rapid technological change, and expanding global
economic, demographic and other issues – some of
trade. Ontario’s changing demographics, along with
which may differ from trends discussed in national
external and internal economic challenges, are also
reports. New South Wales created the Fiscal
expected to put pressure on the demand for public
Responsibility Act in 2005, which requires that the
services. A significant risk noted in the report is
state government assess its long-term fiscal gaps every
declining funding from the federal government, which
five years. Queensland and Victoria do not have similar
is shifting more fiscal burden onto the provinces.
legislation requiring fiscal sustainability reporting.
Mitigating strategies reported include investments
in infrastructure, health care and education that will
increase productivity and support economic growth,
and strategies to manage cost pressures in the delivery
of services.
Indicator Publication
Sustainability
5 year trend: Expense by Function FSD&A (Public Accounts)
5 year trend: Ratio of Expense to GDP FSD&A (Public Accounts)
5 year trend: Net Liabilities and Accumulated Surplus FSD&A (Public Accounts)
5 year trend: Non-financial assets as a portion of liabilities FSD&A (Public Accounts)
5 year trend: Net Liabilities to GDP FSD&A (Public Accounts)
5 year trend: Taxpayer-supported debt to GDP FSD&A (Public Accounts)
Credit Rating comparison to other Provinces and Canada FSD&A (Public Accounts)
Interprovincial comparison of taxpayer-supported debt as a
Provincial Debt Summary (Public Accounts)
percentage of GDP
Interprovincial comparison of taxpayer-supported debt service costs
Provincial Debt Summary (Public Accounts)
as a percentage of revenue
5 year trend (Total and Taxpayer Supported): Debt to Revenue
Provincial Debt Summary (Public Accounts)
(percent)
5 year trend (Total and Taxpayer Supported): Debt per Capita Provincial Debt Summary (Public Accounts)
5 year trend (Total and Taxpayer Supported): Debt to GDP ratio Provincial Debt Summary (Public Accounts)
Provincial Credit Rating Provincial Debt Summary (Public Accounts)
Budget and forecast for the next three years of:
Taxpayer supported, Self Supported, and Total Debt as a
Budget and Fiscal Plan
percent of GDP
Taxpayer-supported debt per capita
Flexibility
5 year trend: Own-source Revenue to GDP FSD&A (Public Accounts)
5 year trend: Public Debt Charges to Revenue (interest bite) FSD&A (Public Accounts)
5 year trend (Total and Taxpayer Supported): Public Debt Charges
Provincial Debt Summary (Public Accounts)
to Revenue (interest bite)
Budget and forecast for the next three years of:
Taxpayer Supported interest as a percent of revenue Budget and Fiscal Plan
(interest bite)
Vulnerability
5 year trend: Government-to-Government Transfers to Total
FSD&A (Public Accounts)
Revenue
5 year trend: Non-Hedged Foreign Currency Debt to Total
FSD&A (Public Accounts)
Provincial Debt
Jason Reid
Executive Director
Denver Wigg
Manager
Monika Miskiewicz
Senior Audit Associate
Location
623 Fort Street Barbara Underhill
Victoria, British Columbia Audit Associate
Canada V8W 1G1
Erin Sass
Office Hours
Audit Associate
Monday to Friday
8:30 am – 4:30 pm
Telephone: 250-419-6100
Toll free through Enquiry BC at: 1-800-663-7867
In Vancouver dial: 604-660-2421
Fax: 250-387-1230
Email: bcauditor@bcauditor.com
Website: www.bcauditor.com
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