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.

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.

1. 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."
    
2. 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:

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."