Office of the Auditor General
February 2, 2009Auditor General Releases Report on
Audit of Financial Statements
of the Province for the Year Ended 31 March 2008
John L. Noseworthy, CA, Auditor General, today released his Report
to the House of Assembly on the Audit of the Financial Statements of the
Province of Newfoundland and Labrador for the Year Ended 31 March 2008.
The report provides information on the financial condition of
Government and comments on Government's compliance with generally
accepted accounting principles and adherence to principles of sound
financial accountability.
Report Highlights
The Financial Condition of the Province
For the year ended 31 March 2008 there was a $1.4 billion reduction
in the Province�s net debt (2007 - reduction of $126 million) and a $1.4
billion surplus for the year (2007 - $154 million surplus). As well,
Government recently announced that for the first time since
Confederation, Newfoundland and Labrador is considered to be a "Have
Province". This means that for Federal equalization transfer purposes,
we are considered to be financially self-reliant and will no longer
receive these transfers. However, "Have Province" status is subject to
future review and could change if the Province�s fiscal situation
changes.
Mr. Noseworthy stated "However, the significant positive
improvement in the Province�s financial position during the year cannot
be viewed in isolation. The optimism resulting from the improvement must
be put into perspective by considering the important changes in the
Province�s economic situation since year end. Many of these changes have
had or will have a significant impact on the Province�s fiscal
situation." The most significant change is the current world
economic downturn which resulted in a significant decline in the market
value of the Province�s pension fund assets since year end. In recent
months there have been huge changes in oil prices which can have either
a positive or negative impact depending on which way the price changes
go. The Province will also be affected by impacts being felt directly by
business in the Province resulting from the economic downturn, e.g. the
impact on mining operations in Labrador and on pulp and paper operations
in Grand Falls-Windsor.
While many of the changes being experienced have had or will have a
significant negative impact on the Province�s fiscal situation, there
are others which are expected to have a significant positive impact.
These include impacts from several recent events, e.g. development of
the White Rose expansion oil fields, signing of an agreement with
industry partners to develop the Hebron-Ben Nevis oil field, proposed
construction of the Vale Inco hydromet facility in Long Harbour,
developments with the Lower Churchill project, and reaching payout on
the Hibernia project in the near future.
The following analysis is based on the financial position of the
Province for the 2008 fiscal year.
Net Debt
The Province�s net debt as at 31 March 2008 of $10.2 billion, on a
per capita basis, represents approximately $20,000 for each
Newfoundlander and Labradorian. Mr. Noseworthy stated: "It
remains the highest net debt per capita of any province in Canada, and
based on information obtained from Government, is well above the
national average of approximately $10,000 per capita. As well, at 35 per
cent, the Province still has one of the highest net debt as a percentage
of GDP of any province and remains in one of the lowest credit rating
categories of all provinces."
Results of Operations
Total revenues increased from $5.5 billion in 2007 to $7.1 billion
in 2008, while total expenses increased from $5.4 billion in 2007 to
$5.7 billion in 2008. Mr. Noseworthy stated "Although recent
surpluses may be perceived as being an abundance of money available for
Government programs, Government will continue to be challenged to meet
the expenditure needs of the Province, as well as the need to address
its significant debt." In particular it was
noted that for each dollar of revenue in 2008, approximately 57.0 cents
was allocated as follows:
- 10.5 cents to pay the interest on our debt (also known as the
"interest bite");
- 16.6 cents spent on education; and
- 29.9 cents spent for health and community services.
- Revenues
Federal revenues as a proportion of total revenues have
decreased from 49.1 per in 1999 to 25.0 per cent in 2008, while the
proportion of oil revenues has increased significantly from being an
immaterial amount in 1999 to $1.8 billion (24.6 per cent) in 2008.
There have been considerable fluctuations in the price of oil, from
a high of approximately US$150 per barrel to US$40 by December 2008.
Low oil prices will have a significant negative impact on the
Province�s future fiscal position. In fact, Government announced in
December 2008 that if oil prices continue at below US$60 per barrel,
there could be deficits of several hundred million dollars in the
2010 fiscal year, as well as potential deficits in subsequent years.
Mr. Noseworthy stated: "This information demonstrates the
volatility that exists in predicting oil revenues. In most
instances, the issues creating the volatility are outside of
Government�s control."
- Expenses
Funding for the Departments of Health and Community Services,
and Education have increased significantly since 1999. Funding for
the Department of Health and Community Services has increased from
$1.3 billion (30.7 per cent of total expenses) in 1999 to $2.1
billion (37.5 per cent) in 2008, while funding for the Department of
Education has increased from $761 million (18.5 per cent of total
expenses) in 1999 to $1.2 billion (20.8 per cent) in 2008. Debt
expenses decreased from approximately $1.0 billion in 1999 to $751
million in 2008. Although impacted by declining interest rates, the
reduction was primarily caused when, in March 2006, the Province
used approximately $2.0 billion of the proceeds from the Atlantic
Accord (2005) agreement to reduce the unfunded liability of the
Teachers� Pension Plan. Mr. Noseworthy stated: "While debt
expenses have decreased, the Province still has one of the highest
interest costs as a percentage of total revenues of any province in
Canada, resulting in fewer resources to allocate to programs and
services. Furthermore, the $1.6 billion decline in the market value
of the Province�s pension fund assets, subsequent to year end, will
increase the unfunded pension liability and result in higher
interest costs."
Summary
Although the Province has recorded a surplus for each of the past
three years and has budgeted a surplus again for 2009, the following
should be considered:
The Province would need a surplus of $300 million each year for
almost 34 years to eliminate its existing net debt of $10.2 billion,
i.e. to be debt free.
With Federal transfers at $1.8 billion (25.0 per cent) of total
revenues in 2008, the Province is still heavily reliant on the
Federal government to help pay for the costs of such programs as
health, education, and social services.
Health and education expenses are increasing and accounted for
$3.3 billion (58.3 per cent) of total expenses in 2008(in 2007 they
accounted for $3.1 billion or 57.7 per cent of total expenses).
Recent annual surpluses have been due in large part to increased
oil revenues, with actual oil revenues in 2008 of $1.8 billion
exceeding budgeted oil revenues of $1.0 billion by $715 million or
approximately 70 per cent. While this is good for the Province,
these revenues are generated from non-renewable resources and are
very vulnerable to changes in world oil prices and production levels
- factors which are outside Government�s control.
The current world economic downturn has resulted in a
significant decline in the market value of the Province�s pension
fund assets since year end.
In addition to these factors, there are others which could
significantly impact future annual surpluses or deficits, including an
aging infrastructure, an aging population, changes in population
migration, interest and currency rate fluctuations, changes in GDP,
demand for Government programs and services, and changes in Federal
programs and funding. Mr. Noseworthy stated: "Given the
significant fluctuations in operating results in the past and possibly
in the coming years, it is important that Government take a cautious and
informed approach to managing its financial resources."
Retirement Benefits - Pensions
The Province�s unfunded pension liability as at 31 March 2008
totalled $1.5 billion, a decrease of $466 million or approximately 25
per cent from the balance of $1.9 billion as at 31 March 2007. The $1.5
billion unfunded pension liability continues to represent a significant
debt for Government, which, in 2008, cost the Province $113.5 million in
interest.
Subsequent to 31 March 2008, there was a significant decline in the
market value of the Province�s pension fund assets. The market value
decreased from approximately $7.2 billion as at 31 March 2008 to $5.6
billion in November 2008, a decrease of $1.6 billion. It was disclosed
in the statements that the reason for this significant decline was the
effect that the global economic uncertainty has had on the financial
markets. This decline in asset value means that the Province�s unfunded
liability has increased. Mr. Noseworthy stated: "The unfunded
pension liability continues to be a significant debt. Addressing this
liability should remain a priority for Government."
Retirement Benefits - Group Health and Life Insurance
The liability for group health and group life insurance retirement
benefits has added to the already considerable debt load of the Province
and is expected to increase in each of the next four years. The net
liability as at 31 March 2008 was $1.5 billion (2007 - $1.4 billion). By
2012, the net liability is expected to total $1.9 billion, an increase
of approximately $400 million or 27 per cent over 2008, if action is not
taken to address it. In 2008, interest costs associated with this
liability totalled $76.8 million. Mr. Noseworthy stated:
"Government should carefully manage its liability relating to group
health and group life insurance retirements benefits."
Environmental Liabilities
Although the Province�s environmental liability relating to
remediation costs for contaminated sites may be a significant amount,
only $8.3 million was recorded as a liability in the Province�s
financial statements as at 31 March 2008 (2007 � $7.3 million). As
outlined in previous years, a report made public by Government in 2004
referred to an estimated cost of more than $237 million relating to the
remediation of contaminated sites in the Province. The most significant
environmental issue reflected in the report related to regional waste
sites. Government has made little progress in this area since it was
first reported in 2002. Mr. Noseworthy stated: "Government has
made little progress in this area since I first reported my concerns in
2002. It should be more proactive in identifying all contaminated sites
in the Province for which it is potentially liable, determining the
estimated liability associated with remediation costs, and recording the
resulting liability in the Province�s financial statements."
Mr. Noseworthy�s report is available on the Office of the Auditor
General website at
www.ag.gov.nl.ca/ag/finStatements.htm.