Ministry of Finance

Public Accounts of Ontario

2005-2006

Annual Report and Consolidated Financial Statements

---

To The Honourable
James K. Bartleman
Lieutenant Governor of Ontario

May It Please Your Honour:

The undersigned has the honour to present to Your Honour the Public Accounts of the Province of Ontario for the fiscal year ended March 31, 2006, in accordance with the requirements of the Ministry of Treasury and Economics Act.

Respectfully submitted,

The Honourable Greg Sorbara
Minister of Finance
Toronto, August 2006

Introduction

The Public Accounts, which includes this Annual Report and the Consolidated Financial Statements, is a major accountability document of the Province, outlining its financial position and results of operations during the past fiscal year. The Province continues to make improvements in financial reporting and accountability as demonstrated in this Annual Report.

As previously announced, the Province is including school boards, community colleges and hospitals in the Consolidated Financial Statements starting in 2005–06. The government also has improved the timeliness of the Province's financial reporting by advancing the date of tabling this Annual Report and the Consolidated Financial Statements this year.

Producing the Public Accounts of Ontario requires the involvement and co‑operation of a large number of staff in ministries, agencies and the Office of the Auditor General. In addition, consolidating the three broader public sector organizations in the Province's Public Accounts for the first time required considerable effort by staff of these organizations and their respective ministries.  I would like to take this opportunity to thank them for their very important contribution to the Public Accounts process this year.

We welcome comments on these documents and invite you to send your feedback. You may e-mail us at annualreport@fin.gov.on.ca or write to the Office of the Provincial Controller, Re: Annual Report, Ontario Ministry of Finance, First Floor, Frost Building South, 7 Queen's Park Crescent, Toronto ON M7A 1Y7.

Bruce L. Bennett, CA
Acting Provincial Controller
Ontario Ministry of Finance

Table of Contents

Guide to the Public Accounts
Statement of Responsibility

Financial Statement Discussion and Analysis
2005–06 Financial Highlights
Revenues
Expenses
Revenues Compared to Expenses over the Past Decade
Assets
Financial Assets
Investment in Government Business Enterprises
Net Assets of Broader Public Sector Organizations
Tangible Capital Assets
Liabilities
Debt
Other Liabilities
Net Debt
Appendix A – Key Economic Assumptions
Appendix B – Revenue Risks and Sensitivities
– Expense Risks and Sensitivities
– Compensation Costs

Consolidated Financial Statements
Auditor's Report
Consolidated Statement of Operations
Consolidated Statement of Financial Position
Consolidated Statement of Change in Net Debt
Consolidated Statement of Cash Flow
Notes to the Consolidated Financial Statements
Schedules to the Consolidated Financial Statements
Sources of Additional Information

Guide to the Public Accounts

The Public Accounts of the Province of Ontario comprise this Annual Report and three supporting volumes.

Annual Report

The Annual Report includes the Consolidated Financial Statements of the Province of Ontario and a Financial Statement Discussion and Analysis (FSD&A) section that uses narrative and graphs to highlight and explain the numbers in more detail.

The Consolidated Financial Statements are made up of several documents and schedules:

• The Auditor General's Report on the Consolidated Financial Statements expresses the opinion of the Auditor General as to whether the Consolidated Financial Statements fairly report the activities of the government in accordance with Canadian generally accepted accounting principles.
• The Consolidated Statement of Operations reports the annual deficit/surplus from operations in the period. It shows government revenues, the cost of providing services and other ongoing expenses, and the difference between them.
• The Consolidated Statement of Financial Position shows the financial resources of the Province against its obligations. The resulting figure is called net debt. This figure, reduced by non-financial assets (including net assets of broader public sector organizations and tangible capital assets), represents the accumulated deficit.
• The Consolidated Statement of Change in Net Debt shows the combined effect on net debt of the Province's annual deficit/surplus, the net change in the Province's investment in tangible capital assets and the net change in net assets of broader public sector organizations.
• The Consolidated Statement of Cash Flow reports on the change in cash and cash equivalents, to show how the government financed its activities and met its cash requirements over the period.
• Notes and Schedules provide further information and detail on the items in the various statements and form an integral part of the Consolidated Financial Statements. The notes also include a summary of the significant accounting policies that guide the financial statement reporting.

Supporting Volumes

• Volume 1 contains ministry statements, detailed debt and other miscellaneous schedules. The ministry statements reflect the financial activities of the government's ministries on the accrual basis of accounting, providing a comparison of appropriations with actual spending. Ministry expenses in Volume 1 include all expenses that are subject to appropriation approved by the Legislative Assembly but exclude adjustments arising from consolidation of government organizations whose expenses are not appropriated.
• Volume 2 contains the financial statements of significant provincial corporations, boards and commissions that are part of the government's reporting entity, and other miscellaneous financial statements.
• Volume 3 contains detailed schedules of ministry payments.

Statement of Responsibility

The Consolidated Financial Statements are prepared by the government of Ontario in compliance with legislation, and in accordance with accounting principles for governments recommended by the Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants (CICA) and, where applicable, the recommendations of the Accounting Standards Board (AcSB) of the CICA.

The Financial Statement Discussion and Analysis section of this Annual Report is also prepared by the government of Ontario in compliance with legislation and in accordance with the financial reporting principles and practices recommended for governments by PSAB.

The government accepts responsibility for the objectivity and integrity of these Consolidated Financial Statements and the Financial Statement Discussion and Analysis.

The government is also responsible for maintaining systems of financial management and internal control to provide reasonable assurance that transactions recorded in the Consolidated Financial Statements are within statutory authority, assets are properly safeguarded and reliable financial information is available for preparation of these Consolidated Financial Statements.

The Consolidated Financial Statements have been audited by the Auditor General of Ontario and his report appears on page 37 of this document.

Colin Andersen  Deputy Minister August 2, 2006	Philip Howell Associate Deputy Minister August 2, 2006	Bruce L. Bennett, CA Acting Provincial Controller August 2, 2006

Financial Statement
Discussion
 and
Analysis

2005–06 Financial Highlights

After two years of deficits, from a deficit of $5.5 billion in 2003–04 and $1.6 billion in 2004–05 the Province has recorded a modest surplus of $298 million in 2005–06. This represents an improvement of $3.1 billion from the $2.8 billion deficit projected in the 2005 Budget Plan, a $1.9 billion improvement from the $1.6 billion deficit recorded in 2004–05, and a $1.7 billion improvement from the interim $1.4 billion deficit projected in the 2006 Budget.

2005–06 Financial Highlights ($ Millions)	2005–06 Budget Plan2	2005–06 Interim Actual3	2005–06 Actual	2004–05 Actual4
Revenues	81,687	83,939	84,225	77,841
Expenses Before Consolidation of Broader Public Sector Organizations1	83,483	85,276	84,376	79,396
Decrease (Increase) in Net Assets of Broader Public Sector Organizations	–	32	(449)	–
Expenses	83,483	85,308	83,927	79,396
Reserve	1,000	–	–	–
Annual Surplus (Deficit)	(2,796)	(1,369)	298	(1,555)
Liabilities			178,305	182,518
Financial Assets			36,377	41,597
Net Debt			141,928	140,921
Net Assets of Broader Public Sector Organizations			16,739	–
Tangible Capital Assets			16,034	15,178
Non-Financial Assets			32,773	15,178
Accumulated Deficit			109,155	125,743
1 Broader Public Sector Organizations include hospitals, school boards and colleges. Detailed listings are provided in Schedule 7 of the Consolidated Financial Statements.
2 Amounts reported in 2005 Budget, which exclude the impact of consolidation of broader public sector organizations.
3 Amounts reported in 2006 Budget, which include the impact of consolidation of broader public sector organizations.
4 Amounts reclassified as required to conform to the 2006 presentation.

The improvement of the Province's fiscal position from the 2005 Budget Plan can be primarily attributed to two factors: (1) higher than forecast tax revenues; and (2) the impact of the consolidation of broader public sector (BPS) organizations.  The improvement from the interim was largely due to lower than anticipated spending, including the impact of consolidation of BPS organizations.

2005-06 Revenue Summary

In 2005–06, the Province recorded revenues of $84.2 billion, an amount $2.5 billion higher than that forecast in the 2005 Budget Plan, and $286 million higher than interim.  This represents an increase in revenue of $6.4 billion from 2004–05.  Of the $2.5 billion difference between actual revenues and those forecast in the 2005 Budget Plan, $2.2 billion can be attributed to higher than projected tax revenues, while $289 million can be attributed to higher than expected income from government business enterprises.  (See the REVENUES section on page 9 for a further breakdown of 2005–06 Provincial revenues as compared to projections in the 2005 Budget Plan and the 2004–05 actual.)

2005-06 Expense Summary

In 2005–06, the Province recorded expenses of $83.9 billion, an amount $444 million higher than projected in the 2005 Budget Plan, and $1.4 billion lower than interim.  This represents an increase of $4.5 billion from 2004–05, when the Province recorded a deficit of $1.6 billion.

As compared to the 2005 Budget Plan, spending on infrastructure, including Move Ontario, was $2.0 billion higher than expected.  This additional spending was partially offset by lower than expected Interest on Debt cost of $777 million, lower health care spending after consolidation of the hospitals sector of $528 million, and lower general government spending of $282 million.

Actual expenses before consolidation of BPS organizations were $900 million lower than interim, while the impact of consolidation of BPS organizations lowered expenses by $481 million compared to the interim estimate of an increase in expense of $32 million.

Additionally, the budgetary reserve of $1.0 billion to protect against unexpected and adverse changes in the economic and fiscal outlook was not required. (See the EXPENSES section on page 13 for a further breakdown of 2005–06 Provincial expenses as compared to projections in the 2005 Budget Plan and the 2004–05 actual.)

Provincial Debt

As of March 31, 2006, total debt for the Province stood at $155.3 billion, down from $156.8 billion a year earlier. This is the first recorded decrease in the debt since the Province adopted the accounting recommendations of the Public Sector Accounting Board (PSAB) in 1993–94.

Net Debt

Net debt increased by $1.0 billion from $140.9 billion at March 31, 2005 to $141.9 billion at March 31, 2006. The increase resulted from higher net investment in tangible capital assets of $856 million and higher net assets of BPS organizations of $449 million, partially offset by the 2005–06 surplus of $298 million.

Accumulated Deficit

The accumulated deficit decreased by $16.5 billion to $109.2 billion at March 31, 2006 from $125.7 billion at March 31, 2005. The decrease resulted from the inclusion of the opening net assets of the BPS organizations of $16.3 billion and the 2005–06 surplus of $298 million.

Revenues

Revenues Compared to Budget Plan

As noted above, revenues for the 2005–06 fiscal year were $2.5 billion above the level projected in the 2005 Budget plan. This was mainly due to higher than forecast taxation revenues of $2.2 billion and higher net income from government business enterprises of $289 million.

Personal Income Tax revenue was $1.0 billion above the 2005 Budget forecast due to stronger 2005 wages and salaries growth, at 5 per cent compared to the Budget forecast of 4 per cent (see Appendix A for key economic assumptions).  Additionally, 2004 tax assessments were $527 million higher than forecast.

Corporations Tax revenue was $736 million above the 2005 Budget forecast, reflecting higher than anticipated revenues from 2004 tax returns.

Other Taxes revenues were $300 million above the 2005 Budget forecast primarily due to a $295 million higher Electricity Payments-in-Lieu of Taxes arising from the combined improved financial performance of Ontario Power Generation Inc. (OPG), Hydro One Inc. (Hydro One) and municipal electric utilities.

Employer Health Tax revenue was $164 million above the 2005 Budget forecast primarily due to stronger 2005 wages and salaries growth than forecast in the Budget and prudence included in the revenue forecast.

Net income from Government Business Enterprises was $289 million above the 2005 Budget forecast, largely due to higher combined net incomes of Hydro One and OPG.  This higher than forecast net income was largely the result of increased electricity revenues due to strong demand during the unusually hot summer of 2005.  Net income from the Ontario Lottery and Gaming Corporation (OLGC) was also higher than forecast largely due to better than expected results from the commercial casinos, racetrack slot operations and charity casinos.  The performance of commercial casinos was boosted by improved marketing programs initiated at the Niagara casinos and better than expected weather conditions during the winter season.  The racetracks and charity casinos benefited from a combination of higher revenues and cost savings realized in a number of areas. 

Revenues Compared to 2004–05

As noted above, total revenues in 2005–06 were $6.4 billion higher than 2004–05.  This reflected a $3.9 billion increase in taxation revenues, a $1.4 billion increase in transfer payments from the Government of Canada, a $730 million increase in income from investment in government business enterprises and a $343 million increase in other non-tax revenues.

Taxation Revenues

Taxation revenues were $3.9 billion higher than 2004–05 primarily due to the following:

• A Personal Income Tax (PIT) revenue increase of $1.7 billion or 9 per cent, reflecting 2005 wages and salaries growth of 5 per cent and a $484 million net increase in adjustments arising from revised prior year revenue estimates;
• A Retail Sales Tax (RST) revenue increase of $699 million or 5 per cent, resulting from continued growth in consumer and business spending subject to sales tax.  In 2005, Ontario retail sales grew by 5 per cent;
• An Ontario Health Premium revenue increase of $613 million, reflecting the application of the premium to a full year in 2005–06 compared to nine months in 2004–05;
• An Other Taxes revenue increase of $491 million primarily due to a $440 million higher Electricity Payments-in-Lieu of Taxes revenue.  This reflected the combined improved financial performance of OPG, Hydro One and municipal electric utilities;
• An Employer Health Tax revenue increase of $311 million or 8 per cent, primarily due to strong 2005 wages and salaries growth of 5 per cent; and
• A Corporations Tax revenue increase of $101 million or 1 per cent, roughly consistent with flat profit growth.

Government of Canada Transfers

Government of Canada Transfers were $1.4 billion higher than 2004–05 mainly due to the following:

• A combined $1.6 billion increase in the Canada Health Transfer and the Canada Social Transfer; and
• An increase of $272 million in transfers for Early Learning and Child Care funding which began in 2005–06, but will be eliminated after 2006–07 due to the Federal Government's termination of the agreement.

These increases were partially offset by decreases of:

• $191 million in Canada Health and Social Transfer Supplements;
• $193 million related to Medical Equipment Funds; and
• $253 million in Agricorp revenue because of one-time reimbursement for costs Ontario incurred on behalf of the Federal Government in 2004–05 under certain cost sharing programs.

Income From Investment In Government Business Enterprises

Income from Investment in Government Business Enterprises increased by $730 million, mainly due to a $663 million increase in net income from OPG, primarily resulting from reforms included in the Electricity Restructuring Act, 2004.  The legislation resulted in stable and predictable prices for electricity provided by OPG.  During the unusually hot summer in 2005, OPG also benefited from higher electricity revenues.

Other Non-Tax Revenues

Other Non-Tax revenues were $343 million higher than 2004–05 mainly due to the following:

• An increase of $169 million in revenues from the sale of electricity purchased from non-utility generators.  This change resulted from reforms included in the Electricity Restructuring Act, 2004.  Under the act, the Ontario Electricity Financial Corporation (OEFC) began receiving actual contract prices for power from ratepayers, effective January 1, 2005.  As a result, OEFC no longer incurs losses on these power purchase contracts;
• An increase of $160 million in the revenue from the Net Reduction of Power Purchase Contracts due to a full year implementation of the revised accounting policy on the elimination of the liability for power purchase agreements.  The policy went into effect on January 1, 2005;
• An increase of $113 million in Sales and Rentals revenue due to higher revenue from the sale of properties; and
• An increase of $201 million in various Other Non-Tax revenues including Reimbursements, Fees and Licences and Liquor Licence Revenue.

These increases in Other Non-Tax revenues were partially offset by a $213 million decrease in Vehicle and Driver Registration Fees resulting from a refinement in the method of accounting for revenues. Also partially offsetting increases in Other Non-Tax revenues was a decrease of $87 million in Royalties primarily related to the one-time $70 million retroactive reduction in 2005–06 Crown stumpage fees designed to assist the forestry sector.

Composition, Trends and Risks

In the past decade, total revenues increased by $34.5 billion or 69 per cent from $49.7 billion in 1995–96 to $84.2 billion in 2005–06.  During the same period, nominal gross domestic product (GDP) increased by 63 per cent. The largest source of provincial revenue is taxation, which accounted for 74 per cent of the Province's total revenues on average over the past decade and 71 per cent in 2005–06. About 68 per cent or $23.6 billion of the increase in revenues arose from taxation in the past 10 years.

Taxation revenue is sensitive to economic conditions, changing by $590 million for each percentage point change in nominal GDP growth. The change can vary significantly depending on the composition and source of changes in GDP growth. As shown in the chart on the next page, Corporations Tax revenue fluctuated greatly over the past 10 years from a decrease of 28 per cent in 2001–02 to an increase of 48 per cent in 2004–05. Personal Income Tax (PIT) revenue experienced fewer fluctuations although it increased by 9 per cent in 2005–06 compared to the average annual growth rate of 3 per cent in the last decade. Retail Sales Tax (RST) revenue has been growing steadily, despite a slowdown from 2001–02 to 2003–04. The Province included $1.0 billion in its annual Budget as a reserve against these and other uncertainties. Appendix B outlines major revenue and expense risks and sensitivities facing the Province.

Taxation revenues increased by 65 per cent in the past decade, while nominal GDP increased by 63 per cent. PIT, RST and Corporations Tax revenues combined accounted for 60 per cent of the Province's total revenues on average over the past 10 years. Their contribution to total revenues decreased to 55 per cent in 2005–06.

Transfers from the Federal Government account for about 16 per cent or $5.4 billion of the increase in total revenues over the past decade.  These transfers have become the third major source of revenues, after PIT and RST revenues. They accounted for 12 per cent of total revenues on average in the past decade. Their contribution to total revenues increased to 16 per cent in 2005–06. These transfers are determined by a number of factors, including the fiscal situation at the federal level, funding formulae, and federal policy.

Other ongoing sources of provincial revenue include the income of provincially owned business enterprises, as well as fees, permits, sales and rentals.

Expenses

Expenses Compared to Budget Plan

Total 2005–06 expenses were $444 million higher than expected in the 2005 Budget.  Transportation spending was $2.0 billion higher than forecast due to the government's in-year decisions to invest in transportation infrastructure including public transit, municipal roads and bridge projects.  The higher transportation spending was partially offset by lower than forecast spending in other areas.

• Interest on Debt was $777 million lower due to lower than forecast long-term interest rates and cost-effective debt management.
• General Government spending was $282 million lower than forecast.  Of this amount, $158 million represents lower than projected expenses for power purchases resulting from lower than projected output from non-utility generators.  The balance represents lower than expected contingency fund spending.
• Health Care spending was $528 million lower than forecast primarily due to the impact of consolidation of the hospitals sector. The 2005 Budget did not include the $459 million impact of consolidating the hospitals sector or any of the other BPS organizations.  However, in the 2006 Budget, a consolidation impact of $82 million (increase in expense) was included in 2005–06 interim expenses.  This impact was based on preliminary information from the sector, which has since been updated to an actual impact of $459 million (decrease in expense).  Compared to interim the impact of consolidating hospitals decreased expenses by $541 million.
  • The total net surplus reported by hospitals in their financial statements was $102 million compared to a forecast net deficit of $86 million.
  • A consolidation adjustment of $274 million (decrease in expense) to account for the capital grants to hospitals on an amortization basis consistent with investments in the Province's own assets.  This adjustment was forecasted at $4 million in the 2006 Budget.
  • Other consolidation adjustments of $83 million include adjustments to match the timing of recording operating transfer payments expenses and revenue recorded by the hospitals during the period to avoid double counting of expenses. Information was not available to forecast these consolidation adjustments in the 2006 Budget. 

Expenses Compared to 2004–05

Total 2005–06 expenses were $4.5 billion higher than 2004–05, primarily due to the following:

• An Environment, Resources and Economic Development sector spending increase of $2.0 billion;
• A Health Care spending increase of $1.3 billion after consolidation of hospitals;
• A Children's and Social Services spending increase of $837 million; and
• An Education spending increase of $740 million after consolidation of school boards.

These increases were partially offset by an Interest on Debt decrease of $349 million.

Environment, Resources and Economic Development Sector

Environment, Resources and Economic Development sector spending increased by $2.0 billion or 32 per cent in 2005–06.  This amount includes:

• A Ministry of Transportation expense increase of $1.6 billion as a result of the following:
  • Move Ontario — $830 million for expansion and modernization of public transit in the Greater Toronto Area (GTA);
  • One-time funding of $400 million for road and bridge repair and upgrading primarily for municipalities outside the GTA;
  • Additional funding of $200 million to the Toronto Transit Commission (TTC) to support the existing subway operations; and
  • Higher gas tax allocation of $114 million to municipalities for new buses and bus refurbishments.
• A Ministry of Municipal Affairs and Housing expense increase of $156 million primarily due to an increase in valuation allowance for outstanding loans;
• A Ministry of Culture expense increase of $131 million including funding for capital projects to support various cultural agencies and attractions, funding to protect Ontario's heritage, to support the libraries sector and the entertainment and creative cluster;
• A Ministry of Economic Development and Trade expense increase of $118 million primarily due to an interest concession provided for a loan to the automotive sector; and
• A Ministry of Research and Innovation expense increase of $107 million due to funding for the Perimeter Institute for Theoretical Physics and the Institute for Quantum Computing.

The above increases were partially offset by a $253 million decrease in Ministry of Agriculture and Food expense mainly due to one-time payments for income support, tobacco farmers, and grain and oilseed farmers in 2004–05. The expiry of time-limited programs such as funding for the bovine spongiform encephalopathy (BSE) crisis also contributed to the decrease.

Health Sector

Health sector expense increased by $1.3 billion in 2005–06 after taking into account the impact of consolidation of hospitals, which decreased expense by $459 million.  Health sector expense before consolidation of the hospitals sector increased by $1.7 billion or 5 per cent. This was partially offset by higher net federal health transfers revenues of $1.3 billion. Of the $1.7 billion increase, $1.2 billion or 71 per cent was concentrated in four areas: the operation of hospitals; service providers for health care services covered under the Ontario Health Insurance Plan (OHIP); the Ontario Drug Programs; and long-term care facilities. Between 70 to 90 per cent of the increase in health care spending (before consolidation of hospitals) in each of the last five years was due to increases in these four areas. The remaining increase in 2005–06 health care spending included additional funding for community, mental, emergency and public health programs.

Children and Social Services Sector

Children's and Social Services spending increased by $837 million or 9 per cent in 2005–06 mainly in the following areas:

• A Ministry of Children and Youth Services expense increase of $479 million resulting primarily from investments in Best Start operating and capital transfers (partially offset by $272 million federal transfer for Early Learning and Child Care), which went towards preparing children ready for Grade 1.  In addition, the ministry incurred higher expenses for child protection services and children's mental health programs; and
• A Ministry of Community and Social Services expense increase of $358 million including $248 million higher social assistance expense due to increased entitlement costs for recipients and an increase of $71 million in transfers for Development Services.

Education Sector

Elementary and secondary education spending increased by $740 million or 7 per cent in 2005–06, including an increase of $88 million due to consolidation of the school boards sector, a $541 million increase in School Board Operating Grants (SBOG) and a $139 million increase in grants for other education programs. The increase in SBOG funding was for hiring new teachers to reduce class sizes to 20 students for junior kindergarten to Grade 3.  The increase in grants for other education programs was mainly to support targeted literacy and numeracy programs under the Student Success initiative.

Interest On Debt

Interest on Debt decreased by $349 million or 4 per cent due to lower long-term financing costs and cost-effective debt management.

Composition, Trends and Risks

In the past decade, total expenses increased by 43 per cent or $25.4 billion from $58.5 billion in 1995–96 to $83.9 billion in 2005–06, compared to a 63 per cent growth in nominal gross domestic product (GDP) over the same period.  Provincial expense as a percentage of nominal GDP decreased from 18 per cent in 1995–96 to 16 per cent in 2005–06.  During this period, the consumer price index (CPI) increased by 23 per cent and Ontario's population grew by 15 per cent.

Transfer payments to individuals and organizations have moved from 69 per cent of government expense in 1995–96 to 75 per cent in 2005–06, accounting for $22.5 billion or 89 per cent of the overall increase. The remainder of the increase was primarily attributable to higher operating costs.

Over 71 per cent of the transfer payments expense or about 53 per cent of total expenses are provided through seven major transfer payment programs in the health care, education and training, and children's and social services sectors. School Board Operating Grants, Long-Term Care Facilities and the Drug Programs have grown more than 130 per cent over the period. Additionally, there was a large increase in School Board Operating Grants in 1998–99 to offset reduction in school board revenues from property taxes.

In the last decade, transfer payments for the Operation of Hospitals grew 67 per cent and OHIP payments to physicians and practitioners grew 73 per cent. All major programs were cut back in the mid to late 1990s but have experienced significant growth in recent years. As many of these are open-ended entitlement programs, they will continue to put pressure on the Province's fiscal plan as the population ages and continues to grow.

As a general rule, transfers to hospitals will need to increase by $147 million for every one per cent increase in hospital net expense. Spending on OHIP payments to physicians and practitioners and hospitals will increase by $118 million for each percentage increase in the salaries of physicians and nurses. School Board Operating Grants will increase by $160 million for each percentage increase in enrolment. They will also increase by an additional $121 million for each percentage increase in the salaries of school staff. Spending on drug programs will increase by $35 million for each percentage increase in utilization. Spending on long-term care facilities will increase by $28 million for each percentage increase in the number of long-term care beds. Spending on social assistance programs will increase by $40 million for each percentage increase in caseload.

As shown in the chart, except for Interest on Debt and the spending in the Environment, Resources and Economic Development sector, which had a slower growth in the past decade, spending in the other sectors experienced significant growth. Spending on health care increased by 83 per cent in the last decade, education and training spending increased by 66 per cent and justice spending increased by 39 per cent. Over the last five years, except for Interest on Debt, which decreased by 17 per cent, all other sectors increased by 28 to 48 per cent.

The effective interest rate on the Province's debt declined from 9.36 per cent in 1995–96 to 6.14 per cent in 2005–06. This reduced the share of provincial spending that goes to interest costs from 14 per cent in 1995–96 to 11 per cent in 2005–06. Though the Province's outstanding debt increased by $56.9 billion or 58 per cent over the past decade, the Interest on Debt expense increased by only $544 million due to the decline in the effective interest rate on debt during that period.  Going forward, Interest on Debt expense will change by $250 million for each 100 basis point change in borrowing rates.

Additional expense risks and sensitivities analysis is included in Appendix B page 29.

Revenues Compared to Expenses over the Past Decade

The chart below shows how revenues and spending have changed over the past 10 years. Revenues increased by $34.5 billion or 69 per cent while expenses increased by $25.4 billion or 43 per cent. The Province had a deficit of $8.8 billion in 1995–96 and was in a deficit position five out of the last ten years. It is back to a surplus position in 2005–06 after two years of deficits due to a higher growth rate in revenue than expense in the last two years.

The addition of revenues and expenses from the electricity sector in 1999–2000 resulted in a significant increase in total revenues and expenses in that year.

Revenue grew by 14 per cent in 2004–05 and 8 per cent in 2005–06, a higher growth rate than the average annual growth rate of 6 per cent over the past 10 years.  The revenue growth rate in the last six years has been closely correlated to the growth in taxation revenues, which reflects the pattern of economic growth over the period.

Expenses in the last three years grew between 6 to 7 per cent per year, compared to the average growth rate of 4 per cent in the past decade, primarily due to increased spending on health care, education and training, and transportation infrastructure.

Assets

Financial Assets

Financial assets at March 31, 2006 totaled $36.4 billion, a $5.2 billion or 13 per cent decrease from the previous year's level of $41.6 billion. Financial assets include cash and cash equivalents, temporary investments, accounts and loans receivable, and the Province's investment in government business enterprises such as the Liquor Control Board of Ontario and other assets.

The decrease in Financial Assets can be attributed to the following:

• A decrease in Cash and Cash Equivalents of $5.7 billion mainly due to 2004–05 pre-funding of $5.9 billion for 2005–06 long-term public borrowing requirements to take advantage of low interest rates in 2004–05; and
• A decrease in Temporary Investment of $1.3 billion mainly due to a lower liquid reserve requirement for lower debt maturities.

The decreases were partially offset by:

• An increase in Investment in Government Business Enterprises of $927 million primarily due to higher net assets of Ontario Power Generation Inc. (OPG), Ontario Lottery and Gaming Corporation (OLGC) and Hydro One resulting from higher net income from these enterprises in 2005–06;
• An increase in Loans Receivable of $487 million mainly due to a $489 million increase in loans to municipalities from the Ontario Strategic Infrastructure Financing Authority (OSIFA);
• An increase in Accounts Receivable of $283 million primarily due to a $324 million increase in taxes receivable corresponding to a $3.9 billion increase in taxation revenue in 2005–06; and
• An increase in Other Assets of $115 million primarily due to consolidation of the $785 million Regulated Price Plan (RPP) Variance Account of the Ontario Power Authority (OPA), partially offset by a reduction in investment by OSIFA of $598 million. The RPP came into effect as of April 1, 2005. The RPP Variance Account is explained in more detail in Note 4 of the OPA financial statements¹. OSIFA reduced its long-term investments as funds were required for loans to municipalities in 2005–06.

Investment in Government Business Enterprises

The Province's investment in government business enterprises (GBEs) was $13.2 billion at March 31, 2006, a net increase of $927 million compared to a balance of $12.2 billion at March 31, 2005. It was increased by a $4.3 billion net income of GBEs and reduced by a $3.4 billion net remittance primarily in the form of dividends to the Province in 2005–06. The majority of income came from four GBEs highlighted in the table below:

Government Business Enterprises ($ Millions)	Net Investment at March 31, 2005	Net Investment at March 31, 2006	Net Income (Loss)		Remittance
Ontario Power Generation Inc. (OPG)	4,983	5,586	603		–
Hydro One Inc.	4,566	4,709	504		361
Ontario Lottery and Gaming Corporation (OLGC)	1,842	2,044	2,027		1,825
Liquor Control Board of Ontario (LCBO)	286	283	1,197		1,200
Other	566	548	(23)		(5)
Total	12,243	13,170	4,308		3,381
Note: This table includes adjustments to government business enterprises with a year-end other than March 31.

 

OPG generates and sells electricity in the Ontario wholesale market and in the interconnected markets. Hydro One transmits and distributes electricity in Ontario. OLGC conducts lottery games and operates commercial casinos, charity casinos and slot machines at racetracks.  LCBO buys and resells alcoholic beverages and also regulates the purchase, sale and distribution of liquor.

The chart shows the amount invested in government business enterprises included in the Consolidated Financial Statements and the income they returned. Investment in and income from government business enterprises increased significantly in 1999–2000 due to the addition of two hydro successor companies OPG and Hydro One.

Net Assets of Broader Public Sector Organizations

For the first time, the Province's Consolidated Financial Statements include the financial results of three broader public sectors (BPS) — hospitals, school boards, and colleges of applied arts and technology.

At April 1, 2005, the net assets of these organizations were $16.3 billion. The increase in net assets of these organizations for the year ended March 31, 2006 was $449 million.  The change in net assets was due to the addition of the 2005–06 surpluses and deficits of each of the three sectors and the impact of consolidation adjustments.

In calculating the surpluses and deficits of the sectors, adjustments were made to their financial results before including them in the Province's Consolidated Financial Statements to eliminate double-counting and to make sure that they are consistent with the government's accounting practices.

The major consolidation adjustments were made to:

• Account for capital grants to hospitals and colleges on an amortization basis;
• Account for the capital assets of school boards on an amortization basis; and
• Match the timing of recording of operating transfer payments expenses of the government with the recording of these transfer payments as revenues by the sector organizations.

The table below shows the net increase in net assets of BPS organizations:

Net Assets of BPS Organizations	Increase/(Decrease) in Net Assets of BPS Organizations
($ Millions)
	Hospitals	School Boards	Colleges	Total
Net Assets as at April 1, 2005	7,293	7,428	1,569	16,290
Deficit/(Surplus) as reported by BPS Sector1	(102)	(169)2	(112)	(383)
Consolidation Adjustments3	(357)	257	34	(66)
Impact of BPS Consolidation	(459)	88	(78)	(449)
Net Assets at March 31, 2006	7,752	7,340	1,647	16,739
1 The deficit (surplus) reported by BPS organizations is based on the same fiscal year as the Province.
2 Results reported by school boards have been adjusted by $972 million to account for capital expenditures on an amortization basis to be consistent with the Province's accounting policies
3 Consolidation adjustments are made to account for capital expenditures on an amortization basis and to eliminate double counting of expenses.

Tangible Capital Assets

Tangible capital assets at March 31, 2006 totaled $16.0 billion, an increase of $856 million compared to $15.2 billion at March 31, 2005.

Tangible Capital Assets ($ Millions)	2005–06	2004–05
Opening balance	15,178	14,628
Net investment during the year1	1,671	1,351
Amortization	(815)	(801)
Closing balance	16,034	15,178
1 Net investment in 2005–06 included acquisition of tangible capital assets of $1,675 million, gain on sale of tangible capital assets of $41 million, less $45 million proceeds on sale of tangible capital assets.

Tangible capital assets include land, buildings, highways and bridges owned by the Province and all tangible capital assets owned by government organizations (other than Broader Public Sector organizations) that are consolidated in the Province's Consolidated Financial Statements. The remaining other tangible capital assets owned by the Province such as computers, leased capital assets, equipment, vehicles and furniture, are expensed when purchased. Starting in 2007–08, the costs of these remaining other tangible capital assets will be capitalized and amortized over their useful lives in the Province's Consolidated Financial Statements.

Of the $1.7 billion invested in tangible capital assets in 2005–06, $1.1 billion was invested in the rehabilitation and expansion of highways, bridges and other transportation infrastructure.  The remainder was invested in buildings and land.

TRANSPORTATION INFRASTRUCTURE includes provincial highways, bridges and related structures and facilities that are in service and/or under construction.  A total of 264 highways are in service.  This represents 16,524 kilometers of highways or about 39,263 kilometers of highway lanes, and accounts for about 80 per cent of the $6.9 billion net book value of transportation infrastructure. The remaining 20 per cent of the net book value of transportation infrastructure is comprised of the Province's over 2,800 bridges.

LAND includes land acquired for transportation infrastructure, parks, buildings, and other program use and land improvements that have an indefinite life. Land excludes Crown land and is not amortized.

BUILDINGS include more than 3,500 buildings that the Province owned at March 31, 2006. These are used mainly by ministries and agencies delivering government programs. They include office buildings, institutional buildings and owned facilities.

OTHER includes mainly railway equipment, computer equipment and furniture owned by government organizations.

Liabilities

Debt

During 2005–06, the Province's total debt decreased by $1.5 billion, resulting from debt retirement of $21.4 billion, partially offset by debt issues of $19.9 billion, including long and short-term public and non-public debt for the Province and those organizations that are consolidated on a line-by-line basis. Debt is comprised of treasury bills, commercial paper, medium and long-term notes, savings bonds, debentures and loans.

Of the total debt issued by the Province in 2005–06, $17.1 billion was long-term public debt of which $14.0 billion or 82 per cent was completed in the Canadian dollar domestic market.

In 2005–06, the Province raised $1.8 billion from Ontario Savings Bonds and $12.2 billion from other domestic bond issues. The remaining debt was issued outside Canada and consists of $1.8 billion from the Global/U.S. dollar market and $1.3 billion from other sources.

The Ontario Financing Authority (OFA) manages the borrowing, debt and cash management activities of the Province and the Ontario Electricity Financial Corporation (OEFC). The OFA's debt management principles include: ensuring cost-effective borrowing; aiming for a smooth maturity profile; and limiting the Province's exposure to currency and interest rate fluctuations. To achieve these goals, the OFA follows prudent debt management policies and uses financial derivatives such as options and swaps. For more information, please refer to Note 1 on “Measurement Uncertainty”, page 44 and Note 4 on “Risk Management and Derivative Financial Instruments”, page 52 in the Consolidated Financial Statements.

As shown in the chart, outstanding total debt has increased by $56.9 billion, from $98.4 billion at March 31, 1996 to $155.3 billion at March 31, 2006. An increase of $31.3 billion occurred in the fiscal year ended March 31, 2000 when the OEFC (which manages the debt of the former Ontario Hydro) was first consolidated into the Province's accounts.  Debt as a percentage of nominal gross domestic product in 2005–06 was 29 per cent compared to 30 per cent in 1995–96.

Annual interest expense increased from $8.5 billion in 1995–96 to $9.0 billion in 2005–06. The slower growth in interest costs is largely a reflection of declining interest rates during the period. Interest expense as a percentage of outstanding debt decreased from 9 per cent in 1995–96 to 6 per cent in 2005–06.

The refinancing of maturing debt will remain a major component of future borrowing. The Canadian domestic market will remain the main funding source for the Province in 2006–07. However, the Province will maintain a flexible approach to borrowing, monitoring both domestic and international capital markets to seek out diversified borrowing opportunities that minimize debt servicing costs.

Other Liabilities

Liabilities other than provincial debt amounted to $23.0 billion at March 31, 2006, compared to $25.7 billion at March 31, 2005.

Liabilities other than provincial debt include accounts payable and accrued liabilities, liabilities related to power purchase contracts, nuclear funding liability, pensions and other employee future benefits liability, and other liabilities such as deferred revenues.

Accounts payable and accrued liabilities of $13.3 billion, which are reported in Schedule 4 to the Consolidated Financial Statements, make up the largest portion of non-debt liabilities. Accounts payable and accrued liabilities decreased by $357 million in 2005–06 primarily due to a reduction in the liability for Canada Revenue Agency overpayment and restructuring liability.

Liabilities related to power purchase agreements and nuclear funding liability are explained in more detail in Note 5, page 54, of the Consolidated Financial Statements and in Notes 9 and 10 of the Ontario Electricity Financial Corporation (OEFC) financial statements². During 2005–06, the nuclear funding liability decreased by $642 million primarily due to a contribution of $709 million towards discharging this liability.

Other liabilities decreased by $1.3 billion primarily due to a $939 million decrease in deferred revenues related to federal transfers recognized as revenue in 2005–06. Also, the $528 million Electricity Consumer Price Protection Fund (ECPPF) liability (due to electricity consumers under the government's interim pricing plan outstanding at March 31, 2005) was settled. A final determination of the ECPPF surplus accumulated from low volume and designated consumers for the interim pricing plan period was made and the amount was transferred to the Independent Electricity System Operator (IESO) to provide credits to eligible consumers during 2005–06.

Net Debt

Net debt was $141.9 billion at March 31, 2006, compared to $140.9 billion at March 31, 2005. This increase represents a net investment in tangible capital assets of $856 million and an increase in net assets of BPS organizations of $449 million, which was partially offset by the 2005–06 surplus of $298 million.

Net debt is calculated as the difference between financial assets and liabilities. It represents the government's future revenue requirements to pay for past transactions and events.

The change in net debt in a year measures whether the revenues raised were sufficient to cover government spending including the acquisition of tangible capital assets. An increase in net debt means that more future revenues will be needed to pay for past transactions and events.

Over the last ten years, there were three major events that had a significant impact on the Province's net debt:

1. Electricity sector restructuring in 1999–2000;
2. Adoption of PSAB standard for tangible capital assets in 2002–03; and
3. Adoption of PSAB standard for consolidation of broader public sector organizations in 2005–06.

Net debt increased by $40.0 billion in the last decade from $101.9 billion at March 31, 1996, to $141.9 billion at March 31, 2006. The increase was due to addition of the unfunded liability (or “stranded debt”) of the Ontario Electricity Financial Corporation (OEFC) electricity sector of $20.3 billion at March 31, 2000, the cumulative annual net deficit of the past ten years of $16.5 billion, the net increase in tangible capital assets of $2.7 billion since April 1, 2002 and the net increase in net assets of broader public sector organizations of $449 million since April 1, 2005.

During 2005–06, OEFC recorded an excess of revenue over expense of $1.1 billion. As a result, the OEFC's unfunded liability declined to $19.3 billion as at March 31, 2006. This is the first time that the unfunded liability has declined below its initial level since the former Ontario Hydro was restructured on April 1, 1999.

Appendix A

Key Economic Assumptions

	2005–06 Budget	2005–06 Actual	2004–05 Actual
Per Cent Change
Real Gross Domestic Product	2.0	2.8	3.1
Nominal Gross Domestic Product	3.9	4.1	5.2
Corporate Profits	3.0	(0.4)	13.7
Retail Sales	4.0	4.7	3.2
Employment	1.0	1.3	1.7
Personal Income	3.8	4.7	4.5
Wages and Salaries*	3.6	5.0	4.7
Change in Thousands
Housing Starts	75.4	78.8	85.1
Job Creation	65	81	103
*Includes supplementary labour income.

Appendix B

Revenue Risks and Sensitivities

The following selected economic, revenue and expense risks and sensitivities tables are reproduced from the 2006 Budget released in March 2006.

Item/Key Components	2006–07 Assumption	2006–07 Sensitivities
Total Revenues
Real GDP	2.3 per cent growth in 2006	$645 million revenue change for each percentage point change in real GDP growth. Can vary significantly depending on composition and source of changes in GDP growth.
GDP Deflator	2.2 per cent increase in 2006
Canadian Interest Rates	4.0 per cent three-month Treasury Bill rate in 2006	Between $65 million and $325 million revenue change in the opposite direction for each percentage point change in interest rates.
U.S. Real GDP	3.4 per cent growth in 2006	Between $195 million and $475 million revenue change for each percentage point change in U.S. Real GDP growth.
Canadian Dollar Exchange Rate	87.0 cents U.S. in 2006	Between $25 million and $115 million revenue change in the opposite direction for each one cent change in the Canadian dollar exchange rate.
Total Taxation Revenues
Revenue Base1	3.6 per cent growth in 2006–07	$590 million revenue change for each percentage point change in nominal GDP growth. Can vary significantly, depending on composition and source of changes in GDP growth.
Nominal GDP	4.5 per cent growth in 2006
Personal Income Tax Revenues
Revenue Base	5.6 per cent growth in 2006–07
Key Economic Assumptions
Wages and Salaries	4.7 per cent growth in 2006	$240 million revenue change for each percentage point change in wages and salaries growth.
Employment	1.3 per cent growth in 2006
Unincorporated Business Income	4.2 per cent growth in 2006
Key Revenue Assumptions
Net Capital Gains Income	18.0 per cent decrease in 2006	$4 million revenue change for each percentage point change in net capital gains income growth.
RRSP Deductions	6.0 per cent growth in 2006	$15 million revenue change in the opposite direction for each percentage point change in RRSP deductions growth.
2005 Tax-Year Assessments2	$20.3 billion	$203 million revenue change for each percentage point change in 2005 Personal Income Tax assessments3.
2004 Tax-Year and Prior Assessments2	$0.8 billion	$8 million revenue change for each percentage point change in 2004 and prior Personal Income Tax assessments3.
Retail Sales Tax Revenues
Revenue Base	4.2 per cent growth in 2006–07
Includes:
Taxable Household Spending	3.6 per cent growth in 2006–07
Other Taxable Spending	4.9 per cent growth in 2006–07
Key Economic Assumptions
Retail Sales	4.2 per cent growth in 2006
Nominal Consumption Expenditure	4.3 per cent growth in 2006	$90 million revenue change for each percentage point change in nominal consumption expenditure growth.
Corporations Tax Revenues
Revenue Base	2.7 per cent growth in 2006–07
Corporate Profits	3.8 per cent growth in 2006	$65 million revenue change for each percentage point change in pre-tax corporate profit growth.
2005–06 Tax Assessment Refunds4	$1.2 billion payable in 2006–07	$12 million revenue change in the opposite direction for each percentage point change in 2005–06 refunds3.
2005–06 Tax Payment Upon Filing	$500 million receivable in 2006–07	$5 million revenue change for each percentage point change in 2005–06 payments upon filing3.
2005–06 Tax Assessment Payments	$600 million receivable in 2005–06 and 2006–07	$6 million revenue change for each percentage point change in 2005–06 assessment payments3.
Employer Health Tax Revenues
Revenue Base	4.3 per cent growth in 2006–07
Wages and Salaries	4.7 per cent growth in 2006	$35 million revenue change for each percentage point change in wages and salaries growth.
Ontario Health Premium Revenues
Revenue Base	4.9 per cent growth in 2006–07
Personal Income	4.7 per cent growth in 2006	$25 million revenue change for each percentage point change in personal income growth.
2005 Tax-Year Assessments	$2.4 billion in 2005	$24 million revenue change for each percentage point change in 2005 Ontario Health Premium Assessments.
Gasoline Tax Revenues
Revenue Base	0.1 per cent growth in 2006–07
Gasoline Pump Prices	88.0 cents per litre in 2006	$2 million revenue change in the opposite direction for each cent per litre change in gasoline pump prices.
Fuel Tax Revenues
Revenue Base	0.7 per cent growth in 2006–07
Real GDP	2.3 per cent growth in 2006	$13 million revenue change for each percentage point change in real GDP growth.
Land Transfer Tax Revenues
Revenue Base	1.4 per cent decline in 2006–07
Housing Resales	4.7 per cent decline in 2006	$10 million revenue change for each percentage point change in both the number and prices of housing resales.
Resale Prices	3.0 per cent growth in 2006
Health and Social Transfers
Canada-wide Revenue Base	$28.6 billion in 2006–07
Ontario Revenue Share	37.7 per cent in 2006–07
Ontario Population Share	38.9 per cent in 2006–07	$44 million revenue change for each tenth of a percentage point change in population share.
Ontario Basic Federal PIT Share	43.9 per cent in 2006–07	$6 million revenue change in the opposite direction for each tenth of a percentage point change in Basic Federal Personal Income Tax base share.
1 Revenue base is revenue excluding the impact of measures, adjustments for past Public Accounts estimate variances and other one-time factors.
2 Ontario 2005 Personal Income Tax (PIT) is a forecast estimate because many 2005 tax returns are yet to be assessed by the Canada Revenue Agency. Some tax amounts for 2004 and prior years are also yet to be assessed.
3 Any change in 2005 or prior-year PIT assessments or 2005–06 Corporations Tax revenues will have an effect on 2006–07 revenues through a change in the revenue base upon which this year's growth is applied.
4 Corporations Tax refunds for 2005–06 are still subject to uncertainty because a high proportion of corporations have until June 30, 2006 to file their 2005 tax returns.
Note: Information reproduced from the 2006 Budget released in March 2006.

Expense Risks and Sensitivities

Many programs delivered by the Province are subject to potential risks and cost drivers such as utilization growth or enrolment and caseload changes. The following sensitivities are based on averages for program areas and might change, depending on the nature and composition of the potential risk.

Program	2006–07 Assumption	2006–07 Sensitivities
Health	Annual growth of 5.8 per cent	One per cent change in health spending: $354 million.
Hospitals	Annual growth of 4.6 per cent	One per cent change in hospital net expense: $147 million.
Drug Programs	Annual growth of 10 per cent	One per cent change in utilization of all drug programs: $35 million (seniors and social assistance recipients).
Home Care	Over 16.7 million hours of homemaking and support services; 8.9 million nursing and professional visits	One per cent change in hours of homemaking and support services: $4 million.
		One per cent change in nursing and professional visits: $6 million.
Long-Term Care Homes	More than 75,500 long-term care home beds	Annual average Provincial operating cost per bed, after resident co-payment revenue, in a long-term care home is $38,000. One per cent change in number of beds: $28 million.
Elementary and Secondary Schools1	Almost two million average daily pupil enrolment	One per cent enrolment change: $160 million school boards' net expense.
College Students	151,000 full-time students	One per cent enrolment change: $7 million.
University Students1	314,000 full-time undergraduate and graduate students	One per cent enrolment change: $22 million of net expense.
Ontario Works1	201,000 average annual caseload	One per cent caseload change: $16 million.
Ontario Disability Support Program1	233,000 average annual caseload	One per cent caseload change: $24 million.
Correctional System	2.8 million adult inmate days per year	Average cost $162 per inmate per day. One per cent change in inmate days: $5 million.
Interest on Debt	Average cost of borrowing is forecast to be approximately 5.1 per cent	The impact of a 100 basis-point change in borrowing rates is forecast to be approximately $250 million.

¹ Based on 2005–06.
Note: Information reproduced from the 2006 Budget released in March 2006.

Compensation Costs

Compensation costs and wage settlements are key cost drivers and have a substantial impact on the finances of both broader public sector partners and the Province.

Sector	Cost of 1 per cent salary increase	Size of Sector
OHIP Payments to Physicians1	$75 million	Almost 22,000 physicians in Ontario, comprising 10,900 family doctors and 11,000 specialists.
Hospital Nurses2	$43 million	Over 53,000 full-time equivalent (FTE) nurses in hospitals.
Elementary and Secondary School Staff3	$121 million	Over 190,000 staff including teachers, principals, administrators, support and maintenance staff.
College Staff4	$11 million	Almost 35,000 staff including faculty, administrators, and support and maintenance staff.
Ontario Public Service5	$51 million	Over 64,000 public servants.
1 Based on 2006–07 outlook.
2 Based on 2005–06.
3 One per cent increase in salary benchmarks in Grants for Student Needs based on 2005–06 school year.
4 Based on 2004–05.
5 Based on 2005–06, reflects total compensation costs.
Note: Information reproduced from the 2006 Budget released in March 2006.

---