Office of the Auditor General
January 21, 2011

Auditor General Releases Report on the Audit of the Financial Statements
of the Province for the Year Ended 31 March 2010

John L. Noseworthy, CA, Auditor General, today presented 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 2010 to the Speaker of the House of Assembly.

Chapter 1 of the Report, Reflections of the Auditor General, indicates the following:

“There have been significant surpluses and reductions in net debt from 2006 to 2009 when offshore oil royalties factored into improving the Province’s financial position and fiscal capacity. At the same time, expenses for infrastructure development and other Government programs, especially health and education, have increased dramatically. As a result of the increasing offshore oil royalties, the Province has been able to increase expenditures and weather the global economic downturn better than most other jurisdictions. The strength of the Province’s continued fiscal performance is evidenced by the positive future economic projections from various Canadian financial institutions.

However, much of the Province’s fiscal performance relates to offshore oil royalties which are volatile by their nature and depend on fluctuations in three main factors: world oil prices, production and foreign currency fluctuations - none of which can be directly impacted by Government. Furthermore, oil is a non-renewable resource and offshore oil royalties will not always be available to fund Government programs. Therefore, the sustainability of current and future Government programs will depend on other revenue sources.

I note that, while there have been substantial improvements in the Province’s financial position and fiscal capacity from 2006 through 2009 as a result of surpluses totalling $4.141 billion during that period, my audit for 2010 identified a number of concerns with regards to the Province’s current financial condition, as follows:

• The large surpluses seen from 2006 to 2009 are gone - the Province reported a $33 million deficit for 2010;
• Expenses have increased substantially in recent years - total expenses have increased by $1.973 billion (36.8%) since 2006 and, in particular, health and education expenses have increased by $1.049 billion (34.7%) since 2006 to $4.072 billion in 2010, accounting for 55.6% of total expenses;
• An increase in net debt of $252 million, from $7.968 billion in 2009 to $8.220 billion in 2010 - the Province would require a surplus of $275 million each year for almost 30 years to eliminate the $8.220 billion in net debt;
• An increase in net debt per capita of $426, from $15,700 in 2009 to $16,126 in 2010 - the second highest in the country and 39.0% higher than the national net debt per capita average of approximately $11,600;
• An increase in debt expenses of $145 million, from $745 million in 2009 to $890 million in 2010 - the highest debt expenses since 2006. The $890 million in debt expenses consists of $457 million related to borrowings, $337 related to the unfunded pension liability (highest interest costs since 2000), and $96 million related to group health and life insurance retirement liabilities;
• The credit ratings provided by the province’s three bond rating agencies have not improved since 2008 and the Province is still among the lowest rated provinces – improvements in the credit rating would reduce the debt servicing cost over time;
• An increase in the unfunded pension liability of $473 million, from $1.704 billion in 2009 to $2.177 billion in 2010 - five of the six pension plans had increases in the unfunded liability, and, for the first time since 2000, pension payments ($469 million) exceeded contributions ($422 million);
• An increase in the liability for group health and group life insurance retirement benefits of $138 million, from $1.630 billion in 2009 to $1.768 billion in 2010 – the liability will continue to increase and is expected to total $2.225 billion by 2014, an increase of approximately $457 million or approximately 25.8% over the 2010 balance of $1.768 billion if no action is taken to address it; and
• A decrease in the Province’s GDP of $6.488 billion, from $31.458 billion in 2009 to $24.970 billion in 2010 - the lowest GDP since 2007. The Province’s net debt as a percentage of GDP increased by 7.6%, from 25.3% in 2009 to 32.9% in 2010.

Government will have to continue to closely monitor the continued sustainability of its program expenditures, the unfunded pension liability and the liability for group health and group life insurance retirement benefits.

I also have concerns with the lack of progress made by Government regarding the identification of contaminated sites and the determination of remediation costs. In my opinion, the environmental liability of $21.1 million currently recorded in the Province’s financial statements is likely understated.”

Mr. Noseworthy's report is available on the Office of the Auditor General website at //www.ag.gov.nl.ca/ag/finStatements.htm

As with prior reports to the House of Assembly, the Auditor General will be available to the media on an appointment basis.

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Media contact:
Nina Goudie
Director of Information Resources
709-729-2346

2011 01 21                                                10:00 a.m.