Ontario Budget 2008: Chapter IV:

Long-Term Public Borrowing

As an agency of the Ministry of Finance, the Ontario Financing Authority (OFA) manages the borrowing, debt, investment and cash management activities of the Province and the Ontario Electricity Financial Corporation (OEFC) in a cost-effective manner.

The interim long-term public borrowing requirement for 2007–08 is $18.0 billion, down $0.8 billion from the $18.8 billion estimated in the 2007 Budget Plan. This decline reflects an improvement in the Province’s fiscal position.

The OFA maintained a flexible approach to borrowing, monitoring both domestic and international capital markets to minimize debt service costs and diversify the borrowing program. The Province typically targets 25 per cent of borrowing from international markets. Approximately $2.6 billion, or 14 per cent, of the borrowing program was raised from international markets as borrowing costs have generally been much higher abroad. While the majority of the borrowing was completed in the domestic market, the Province successfully accessed the international capital markets through two U.S. dollar Global bonds.

Approximately $15.4 billion, or 86 per cent, of the borrowing was completed in the domestic market, through a number of instruments, including:

• syndicated bonds
• bond auctions
• floating rate notes
• Ontario Savings Bonds
• medium-term notes.

Bond markets have been very volatile in recent months, but the Province continues to have relatively steady access to the domestic bond market due to investor confidence in Ontario and the liquidity provided by its benchmark bond issues.

Table 1
2007–08 Borrowing Program: Province and OEFC
 ($ billions)

	Budget Plan	Interim	In-Year Change
Deficit/(Surplus)	0.4	(0.6)	(1.0)
Non-Cash Adjustments	(0.5)	(0.3)	0.1
Investment in Capital Assets	3.3	3.6	0.3
Net Loans/Investments	1.2	2.3	1.1
Debt Maturities	14.4	13.5	(0.9)
Debt Redemptions	0.9	1.3	0.4
Total Funding Requirement	19.7	19.8	0.0
Canada Pension Plan Borrowing	(0.4)	(0.3)	0.2
Decrease/(Increase) in Short-Term Borrowing	(0.5)	(1.4)	(0.8)
Increase/(Decrease) in Cash and Cash Equivalents	0.0	(0.2)	(0.2)
Total Long-Term Public Borrowing Requirement	18.8	18.0	(0.8)
Note: Numbers may not add due to rounding.

Key contributors to the decline in the total long-term public borrowing requirement include a $1 billion improvement in the fiscal position and a $0.9 billion reduction in debt maturities. The decline is partially offset by a $1.1 billion increase in net loans/investments, of which $0.8 billion is attributable to loans to Ontario Power Generation Inc. (OPG). The total long-term public borrowing requirement was further reduced through a $0.8 billion increase in short-term borrowing.

The Province currently holds about $645 million of asset-backed commercial paper (ABCP) in its investment portfolio. This is down by $75 million from the $720 million reported in the 2007 Economic Outlook and Fiscal Review, as the $75 million holding in Skeena Trust was repaid on December 20, 2007, when that trust was redeemed.

Table 2
Medium-Term Borrowing Outlook: Province and OEFC
($ billions)

	2008–09	2009–10	2010–11
Deficit/(Surplus)	0.0	0.0	0.0
Non-Cash Adjustments	(0.9)	(1.7)	(1.9)
Investment in Capital Assets	4.9	6.0	7.1
Net Loans/Investments	1.3	0.8	0.3
Debt Maturities:
Currently Outstanding	20.5	14.6	10.4
Incremental Impact of Future Financing	0.0	0.0	1.9
Debt Redemptions	1.0	1.0	1.0
Total Funding Requirement	26.9	20.6	18.9
Canada Pension Plan Borrowing	(0.6)	(0.7)	0.0
Decrease/(Increase) in Short-Term Borrowing	(2.0)	0.9	0.4
Increase/(Decrease) in Cash and Cash Equivalents	0.0	0.0	0.0
Total Long-Term Public Borrowing Requirement	24.3	20.9	19.4
Note: Numbers may not add due to rounding.

Refinancing maturing debt and funding capital investments are the primary components of the medium-term borrowing outlook. Debt maturities for the Province and the OEFC are projected at $20.5 billion in 2008–09, $14.6 billion in 2009–10 and $12.3 billion in 2010–11.

The government will seek approval by the legislature for additional borrowing authority to meet program requirements. In addition, the government will propose amendments to the Ontario Lottery and Gaming Corporation Act and Liquor Control Act that will address the borrowing requirements for capital expenditures by the Ontario Lottery and Gaming Corporation and the Liquor Control Board of Ontario.

Debt

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $162.3 billion as at March 31, 2008, compared to $157.3 billion as at March 31, 2007.

Ontario’s net debt, the difference between the total liabilities and total financial assets, is projected to be $142.8 billion as at March 31, 2008, compared to $141.1 billion as at March 31, 2007.

Accumulated deficit, the third definition of debt, is the sum of all past Provincial surpluses and deficits. It is projected to decline by $0.6 billion from $106.8 billion as at March 31, 2007, to $106.2 billion as at March 31, 2008.

While the accumulated deficit is forecast to decrease by the amount of the surplus, total debt and net debt are forecast to increase. Total debt is expected to increase due to the government’s capital investments in key priority areas, loans to school boards for capital projects and increased short-term borrowing to maintain cash levels. The increase in net debt is primarily a result of the government’s capital investments.

Investing in these capital projects is similar to a family investing in a house using a mortgage, which is paid off over time. Like a mortgage, where the total amount is borrowed at the time a house is purchased, the government borrows the entire amount required to invest in capital investments during construction. This increases total and net debt. The impact on the government’s surplus, and the accumulated deficit, is limited to the amortization costs of these capital investments. Amortization spreads the cost of these investments over the useful life of the assets, instead of charging the total costs upfront for an asset that will be used for many years.

Debt of the Ontario Infrastructure Projects Corporation ("OIPC" or "Infrastructure Ontario") is projected to be $1.6 billion as at March 31, 2008. This debt is included in total debt; however, the impact on net debt is significantly lower, as its debt is largely offset by projected net assets of $1.4 billion. Infrastructure Ontario’s debt is not guaranteed by the Province.

Interim 2007–08 results for OEFC show a projected excess of revenue over expense of about $1.1 billion, reducing the Corporation’s unfunded liability (or “stranded debt of the electricity sector”) from $18.3 billion to $17.2 billion as at March 31, 2008. This would be the fourth consecutive annual decline in the unfunded liability ($2.2 billion below the $19.4 billion level at the time Ontario Hydro was restructured on April 1, 1999). Projected 2008–09 results for OEFC are an excess of revenue over expense of about $1.2 billion, resulting in a further projected reduction in its unfunded liability to about $16.1 billion as at March 31, 2009.

Consolidated Financial Tables

Table 3
Net Debt and Accumulated Deficit
Interim 2008 ($ Millions)

	2003–04	2004–05	2005–06	2006–07	Interim 2007–08	Plan 2008–09
Debt 1
Publicly Held Debt
Bonds 2	116,732	125,279	123,129	128,666	134,302	139,535
Treasury Bills	3,359	3,747	5,215	4,249	5,247	7,247
U.S. Commercial Paper 2	1,156	269	706	254	619	619
Ontario Infrastructure Projects Corporation (OIPC)3	323	1,288	1,323	1,262	1,573	1,950
Other	422	404	387	–	–	–
	121,992	130,987	130,760	134,431	141,741	149,351
Non-Public Debt
Canada Pension Plan Investment Board	10,233	10,233	10,233	10,233	10,233	10,233
Ontario Teachers' Pension Fund	9,487	8,666	7,596	6,411	4,466	3,001
Public Service Pension Fund	3,052	2,886	2,705	2,502	2,260	1,991
Ontario Public Service Employees' Union Pension Fund (OPSEU)	1,450	1,371	1,285	1,188	1,074	946
Canada Mortgage and Housing Corporation	1,047	1,003	960	914	865	813
Other 4	1,096	1,231	1,367	1,314	1,419	1,377
	26,365	25,390	24,146	22,562	20,317	18,361
	148,357	156,377	154,906	156,993	162,058	167,712
Unrealized Foreign Exchange Gains 5	376	424	426	318	225	132
Total Debt	148,733	156,801	155,332	157,311	162,283	167,844
Cash and Temporary Investments	(8,139)	(13,422)	(6,258)	(6,622)	(5,400)	(5,400)
Other Net (Assets)/Liabilities 6	(1,465)	(1,193)	(5,824)	(8,493)	(12,658)	(14,454)
OIPC Net (Assets)/Other Liabilities 3	(313)	(1,265)	(1,322)	(1,096)	(1,386)	(1,758)
Net Debt	138,816	140,921	141,928	141,100	142,839	146,232
Non-Financial Assets 7	(14,628)	(15,178)	(32,773)	(34,324)	(36,663)	(40,056)
Accumulated Deficit 8	124,188	125,743	109,155	106,776	106,176	106,176
1 Includes debt issued by the Province and Government Organizations, including the OEFC. 2All balances are expressed in Canadian dollars. The balances above reflect the effect of related derivative contracts. 3 OIPC's interim 2007–08 debt is composed of Ontario Opportunity Bonds ($323 million), Infrastructure Renewal Bonds ($950 million) and short-term commercial paper ($300 million). OIPC's debt is not guaranteed by the Province. OIPC Net (Assets)/Other Liabilities include cash, temporary investments, accounts receivable, loans receivable, debt issue costs, accounts payable and loans payable. 4 Other non-public debt includes Ontario Municipal Employees Retirement Fund, College of Applied Arts and Technology Pension Plan, Ryerson Retirement Pension Plan, Ontario Immigrant Investor Corporation and indirect debt of school boards (the indirect debt of school boards was incurred in June 2003 to refinance the non-permanently financed debt of 55 school boards; an equivalent amount is included in Net Assets as advance payments to school boards). 5To conform with Public Accounts reporting, unrealized foreign exchange gains, which were previously reported in Other Net (Assets)/Liabilities, are now reported separately. 6Other Net (Assets)/Liabilities include accounts receivable, loans receivable, advances and investments in government business enterprises, accounts payable, accrued liabilities, pensions and the liability for power purchase agreements with non-utility generators. 7Non-financial assets include the Province's tangible capital assets and net assets of hospitals, school boards and colleges, which, starting with fiscal year 2005–06, are consolidated using one-line consolidation. 8Accumulated deficit represents net debt adjusted for non-financial assets. Starting with 2005–06, accumulated deficit includes the opening combined net assets of hospitals, school boards and colleges. Source: Ontario Ministry of Finance.

Table 4
Debt Maturity Schedule
Interim 2008 ($ Millions)

	Currency
	Canadian Dollar	U.S. Dollar	Japanese Yen	Euro1	Other Currencies 2	Interim 2007–08 Total	2006–07 Total
Fiscal Year Payable
Year 1	21,368	4,634	–	795	265	27,062	19,222
Year 2	9,028	1,629	685	1,443	870	13,655	20,556
Year 3	9,280	1,509	–	–	252	11,041	13,720
Year 4	6,168	1,136	–	–	47	7,351	6,438
Year 5	7,935	3,291	–	–	118	11,344	7,127
1–5 years	53,779	12,199	685	2,238	1,552	70,453	67,063
6–10 years	22,672	4,865	94	1,188	1,837	30,656	33,812
11–15 years	9,038	–	–	–	–	9,038	6,424
16–20 years	14,710	–	–	–	–	14,710	12,300
21–25 years	13,486	–	–	–	–	13,486	13,606
26–40 years 3	23,715	–	–	–	–	23,715	23,788
Unamortized Foreign Exchange Gains	–	123	102	–	–	225	318
Total 4	137,400	17,187	881	3,426	3,389	162,283	157,311
Debt Issued for Provincial Purposes
	110,427	15,130	881	3,426	2,463	132,327	128,046
OEFC Debt	25,400	2,057	–	–	926	28,383	28,003
OIPC Debt	1,573	–	–	–	–	1,573	1,262
Total 5	137,400	17,187	881	3,426	3,389	162,283	157,311
1Euro includes debt issued in Euro and French franc legacy currency. 2 Other currencies comprise Australian dollar, New Zealand dollar, Pound sterling, Swiss franc, Hong Kong dollar, South African rand and New Turkish lira. 3 The longest term to maturity is to June 2, 2047. 4 Total foreign currency denominated debt (before unrealized foreign exchange gains) as at March 31, 2008, is projected to be $24.7 billion (2007, $28.2 billion). Of that, $24.0 billion or 97.1 per cent (2007, $27.2 billion or 96.4 per cent) was fully hedged to Canadian dollars. 5 Total debt includes issues totalling $2.7 billion (2007, $3.3 billion) that have embedded options exercisable by either the Province or the bondholder under specific conditions.

Table 5
Medium-Term Outlook
Net Debt and Accumulated Deficit ($ billions)

	2009–10	2010–11
Total Debt	173.2	178.5
Cash and Temporary Investments	(5.4)	(5.4)
Other Net (Assets)/Liabilities	(15.0)	(14.5)
OIPC Net (Assets)/Liabilities	(2.1)	(2.5)
Net Debt	150.6	156.1
Non-Financial Assets	(44.5)	(49.9)
Accumulated Deficit	106.2	106.2
Note: Numbers may not add due to rounding.

Table 6
Derivative Portfolio Notional Value Interim 2008 ($ Millions)

Maturity in Fiscal Year	2008–09	2009–10	2010–11	2011–12	2012–13	6–10 Years	Over 10 Years	Interim 2007–08 Total	2006–07 Total
Swaps:
Interest rate	11,457	8,910	4,561	2,411	7,174	20,552	4,794	59,859	68,565
Cross currency	5,270	5,529	1,972	1,225	2,796	10,057	_	26,849	31,320
Forward foreign exchange contracts	1,933	–	–	–	–	–	–	1,933	1,803
Caps and floors	–	88	–	–	–	–	–	88	138
Total	18,660	14,527	6,533	3,636	9,970	30,609	4,794	88,729	101,826

The table above presents a maturity schedule of the Province’s derivatives, by type, interim at March 31, 2008, based on the notional amounts of the contracts. Notional amounts represent the volume of outstanding derivative contracts and are not indicative of credit risk, market risk or actual cash flows. The Province uses derivatives to hedge and to minimize interest costs. Hedges are created primarily through swaps. Swaps allow the Province to offset existing obligations, effectively converting them into obligations with more desirable characteristics.