Office of the Auditor General
March 24, 2008
Report on Audit of Financial Statements of Province for the Year Ended 31 March 2007
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 2007.
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
Net Debt - There has been little change in the financial condition of the Province over the last year. The Province�s net debt as at 31 March 2007 was $11.6 billion, down slightly (1%) from the $11.7 billion reported for 2006. This net debt, on a per capita basis, represents approximately $23,000 for each Newfoundlander and Labradorian. Mr. Noseworthy stated: "This is still the highest net debt per capita of any province in Canada. As well, at 45.1 per cent the Province still has the highest net debt as a percentage of GDP of any province and continues to be included in the lowest credit rating category of any province."
Results of Operations - In terms of results of operations, for 2007 Government reported a surplus of $154 million, down from the reported surplus of $199 million for 2006. Total revenues decreased slightly from $5.6 billion in 2006 to $5.5 billion in 2007, while total expenses remained virtually the same at $5.4 billion.
Revenues - Federal revenues as a proportion of total revenues have decreased from 49.1 per cent in 1999 to 31.6 per cent in 2007, while the proportion of oil revenues has increased significantly from being immaterial in 1999 to $423 million (7.7%) in 2007. Mr. Noseworthy stated: "The $280 million (40%) decrease in budgeted oil revenues for 2007, along with the $562 million (54%) increase in budgeted oil revenues for 2008, demonstrate the significant impact that volatility in the oil and gas sector can have on the Province."
Expenses - Funding for the Department of Health and Community Services increased from $1,260,697 (30.7% of total expenses) in 1999 to $1,990,479 (37.1%) in 2007, while funding for the Department of Education increased from $761,010 (18.5% of total expenses) in 1999 to $1,106,596 (20.6%) in 2007. Funding for health and education made up 57.7% of the total expenses in 2007. Debt expenses for 2007 totalled $777 million (14.5% of total expenses), down from $947 million (17.7%) for 2006. Mr. Noseworthy stated: "While debt expenses have decreased, the Province still has the highest interest costs as a percentage of total revenues of any province in Canada at 14.1 per cent, resulting in fewer resources to allocate to programs and services."
Although the Province has recorded a surplus for the past two years and has budgeted a surplus again for 2008, the following should be considered:
The Province must have a surplus of $300 million each year for 40 years to eliminate its existing net debt of $11.6 billion, i.e. to be debt free.
With Federal transfers at 31.6 per cent of total revenues in 2007, the Province is 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 $3.1 billion (57.7%) of total expenses in 2007.
The recent annual surpluses have been due in large part to oil revenues, with the mid-year update for 2008 projecting that oil revenues for the year will increase from $1.0 billion to $1.6 billion. 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.
In addition to these factors, there are others which could significantly impact future annual surpluses or deficits, including an aging infrastructure, an aging population, out-migration, interest and currency rate fluctuations, changes in GDP, and demand for Government programs and services.
Addressing Current and Future Surpluses - Now that the Province is receiving higher revenues and is in a surplus position rather than its traditional deficit position, Government faces a new challenge� how best to use the surplus. Government is faced with many alternatives and demands in this regard, including: reducing taxes and fees; using the additional funding for social and other programs; replacing or upgrading its infrastructure; and reducing its significant debt burden. Mr. Noseworthy stated: "It is important that Government take a cautious and informed approach in managing its financial resources."
A review of other provinces in Canada indicated that most have either balanced budget and/or debt reduction legislation which provide legislative direction on how budgets would be developed and how surpluses would be allocated. In addition, some provinces are required to specifically report to the Legislature on their reduction and management of public debt.
Retirement Benefits, Pensions - The Province�s unfunded pension liability as at 31 March 2007 was $1.9 billion, a decrease of $276 million or 12.5 per cent from the $2.2 billion reported in 2006. Mr. Noseworthy stated: "Although there was a reduction in the Province�s overall unfunded pension liability in 2007, the unfunded pension liability related to four of the six pension plans increased by a total of $54.5 million over 2006 (Teachers� Pension Plan, Uniformed Services Pension Plan, Members of the House of Assembly Pension Plan and the Provincial Court Judges� Pension Plan). The unfunded pension liability continues to be a significant debt for Government which, in 2007, cost the Province $174 million in interest costs. Addressing this liability should remain a priority for Government."
Retirement Benefits, Group Health and Group Life Retirement Insurance Benefits - 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 2007 was $1.4 billion (2006 - $1.3 billion). By 2011, the net liability is expected to total $1.7 billion, an increase of approximately $300 million or 21.4 per cent over 2007, if action is not taken to address it. Mr. Noseworthy stated: "Government should carefully manage its liability relating to group health and group life insurance retirements benefits."
Reporting under the Transparency and Accountability Act - Accountability legislation entitled the Transparency and Accountability Act (the Act), came into force on 15 December 2006. The Act requires that strategic, business or activity plans (as applicable for each entity) be tabled in the House of Assembly every three years. It also requires that an annual report be tabled which compares actual results with the approved plan and explains any variance. There has been progress in tabling strategic, business or activity plans in the House of Assembly. However, while Government has been diligent in having annual reports tabled for departments and Crown agencies, the reports provide only general information on the operations of the department or agency. Mr. Noseworthy stated: "The [annual] reports do not provide the information necessary to hold each entity accountable for its performance, including fiscal performance, in relation to its approved plans using established measurable criteria."
Environmental Liabilities - Although the Province�s environmental liability relating to remediation costs for contaminated sites may be a significant amount, only $7.3 million has been recorded as a liability in the Province�s financial statements. 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 I first reported my concerns in 2002. Mr. Noseworthy stated: "[Government] 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
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Nina J. Goudie
2008 03 24 11:30 a.m.
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