Quarterly Ontario Finances: First Quarter 2006-2007

2006-07 First Quarter Quarterly Update - June 30, 2006 Ministry of Finance

Fiscal Summary   2006-07 
($ Millions)  Interim
2005-06
Budget Plan Current*
Outlook
In-Year
Change
Revenue
Expense
83,939  85,730  86,550  820 
Programs 76,218 77,651 78,221 570
Interest on Debt 9,090 9,429 9,278 (151)
Total Expense 85,308 87,080 87,499 419
Surplus/(Deficit) Before Reserve (1,369)  (1,350)  (949)  401 
Reserve - 1,000 1,000 -
Surplus/(Deficit) (1,369)  (2,350)  (1,949)  401 

* First-quarter fiscal forecast as at June 30, 2006.

2006-07 FISCAL OUTLOOK

Bar chart showing that the province is consistently exceeding fiscal targets.

First-quarter results indicate that the government is on track to exceed its fiscal targets in 2006-07. The fiscal outlook for 2006-07 has improved by $401 million from the forecast in the 2006 Budget. The improvement is mainly the result of stronger Corporations Tax revenues and lower interest on debt expense than projected at the time of the 2006 Budget. The deficit is now forecast at $1.9 billion in 2006-07, $0.9 billion if the reserve is not required by the end of the fiscal year.

The government is committed to ongoing fiscal discipline and prudent fiscal management. The Province's medium-term fiscal plan, outlined in the 2006 Budget, projected a balanced budget no later than 2008-09. Based on current fiscal conditions, the government is on track to fulfill this commitment.

By applying a responsible and disciplined approach to fiscal planning, the government has exceeded its fiscal targets while investing in key priority areas. The Province's fiscal plan has been put on a sound footing while the government has made historic and long-term investments in infrastructure, postsecondary education and training, education, health, and programs for Ontario's vulnerable persons and at-risk youth. The 2006-07 outlook remains prudent due to risks to the economic outlook including higher oil prices, further appreciation of the Canadian dollar and further easing in the pace of U.S. economic growth.

These improvements to the Province's fiscal position mean that Ontario's debt-to-GDP ratio (where debt is defined as accumulated deficit) continues to decline, from over 25 per cent in 2003-04 to about 20 per cent this year - the lowest it has been in 15 years.


RECENT DEVELOPMENTS

TERANET INCOME FUND INITIAL PUBLIC OFFERING (IPO)

On June 16, 2006 the government announced that it would receive proceeds of more than $500 million in relation to the completion of the IPO of Teranet Income Fund. The Province agreed to contribute $54 million of its proceeds towards an overall $116 million investment by Teranet for important service improvements and system enhancements to Ontario's electronic land registration system.

The initial revenue and expense pertaining to the transaction of the Teranet Income Fund IPO has been reflected in the first quarter fiscal outlook for 2006-07. While the final amount of revenue expected from the transaction will ultimately depend on the value of the fund's units when they are sold later this fiscal year, proceeds are currently estimated at $570 million. This amount includes $410 million in cash received from the IPO on June 16, 2006 and an estimated deferred payment of a further $160 million which is based on the June 16th $10 IPO unit price for 16 million income fund units. The cash to be received by the Province in a deferred payment will depend on the market price of income fund units at the time the Province's designees sell their income fund units and pay the Province the deferred payment. As such, the $160 million could increase or decrease.

It is proposed that the Contingency Fund under the Ministry of Finance be increased by $516 million as the government determines priority areas in which to invest the proceeds.

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CANADA-ONTARIO AGREEMENT (COA)

The 2006 Budget outlined the revenue and expense impacts of the COA that are key elements of the Province's medium-term fiscal plan. The Budget also indicated that Ontario would work with the federal government to finalize the timing of the remaining funding under this Agreement. The Province continues to rely on the federal government's commitment to the COA and continues to work with it to ensure that all elements of the COA are honoured.

2006 FEDERAL BUDGET TRUSTS

The May 2006 federal budget proposed federal transfers of $1.1 billion over three years to Ontario. These transfers are to be paid into third party trusts contingent on a federal surplus for 2005-06 being greater than $5.6 billion. The Province will review its revenue outlook with respect to federal transfers when the 2005-06 Public Accounts of Canada are released later this year by the federal government.

CONSOLIDATING HOSPITALS, SCHOOL BOARDS AND COLLEGES INTO THE PROVINCE'S FINANCES

In the 2006 Budget, the government implemented a major change in the way that the finances of the Province are reported to the public. For the first time, the Province's financial reporting included the financial results of three important public-sector partners - hospitals, school boards and colleges of applied arts and technology. These sectors receive most of their funding from the taxpayers of Ontario. The outlooks provided in this quarterly update also reflect this change for fiscal years after 2004-05.

CHANGE IN PRESENTATION

Along with including the financial results of hospitals, school boards and colleges in the Province's fiscal outlook, the 2006 Budget presentation of expense changed to provide details on a total expense basis, rather than differentiating between operating and capital expense. This change in presentation is consistent with Public Sector Accounting Board principles, and is also reflected in this quarterly update.

DETAILS OF IN-YEAR CHANGES

REVENUE AT $86.6 BILLION

The 2006-07 revenue outlook, at $86,550 million, is up $820 million from the forecast in the 2006 Budget. Changes in the first quarter are:

  • The Sales and Rentals revenue forecast has increased by $570 million reflecting the expected gross amount of the Province's share of proceeds related to the Teranet Income Fund initial public offering (IPO) announced on June 16, 2006.

  • The Corporations Tax revenue forecast has increased by $250 million due to higher-than-anticipated payments related to 2005 tax return filing.

TOTAL EXPENSE AT $87.5 BILLION

The 2006-07 total expense outlook, at $87,499 million, is up a net $419 million from the forecast in the 2006 Budget, mainly due to an increase of $570 million in program expense related to future investments to be financed through the proceeds from the Teranet Income Fund initial public offering (IPO), partially offset by $151 million in interest on debt savings. Ministry program expense changes this quarter, and the corresponding offsets, include:

  • Ministry of Economic Development and Trade: An additional $2 million fully offset from the Contingency Fund to help Caledonia and surrounding businesses recover from the setbacks suffered as a result of the land dispute, as part of the government's broader strategy to provide support and assistance to the residents and businesses of Caledonia.

  • Ministry of Education - School Boards: An increase of $37 million in school boards' net expense to reflect announced enhancements to the 2006-07 Grants for Student Needs, fully offset from the Contingency Fund.

  • Ministry of Energy: An additional $10 million for the powerWISE advertising campaign, which promotes energy conservation, and an additional $3 million for a Smart Meter communication program, which will help explain how smart meters can provide benefits to consumers, both fully offset from the Contingency Fund.

  • Ministry of Finance: An additional $107 million for the Ontario Home Electricity Relief program that will provide one-time assistance to low-income Ontarians to help with rising electricity costs, fully offset from the Contingency Fund.

  • Ministry of Finance - Contingency Fund: A net increase of $336 million in the Contingency Fund, mainly due to an increase of $516 million to account for priority projects to be funded by the proceeds from the Teranet Income Fund IPO in 2006-07, and partially offset by a decrease of $180 million that was allocated to fund ministries' expense changes as outlined.

  • Ministry of Government Services: An additional $54 million for Teranet service improvements and system enhancements to Ontario's electronic land registration system, offset from proceeds from the Teranet Income Fund IPO. An additional $15 million for migration of routine transactional services to ServiceOntario and the enhancement of other service channels, and $6 million for the continuation of the supply chain management savings strategy, both fully offset from the Contingency Fund.

Interest on debt expense for the year is forecast to be $151 million lower, as debt was issued in favourable terms at interest rates lower than those projected at the time of the 2006 Budget.

RESERVE AT $1.0 BILLION

The current fiscal outlook maintains a $1.0 billion reserve to help achieve the government's overall fiscal objectives and to protect against unexpected and adverse changes in the economic and fiscal outlook.

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FISCAL PERFORMANCE

Statement of Financial Transactions

($ Millions)
2002-03 2003-04 Actual
2004-05
Interim
2005-06
Current*
Outlook
2006-07
Revenue
Expense
68,891 68,400 77,841 83,939 86,550
Programs 59,080 64,279 70,028 76,218 78,221
Interest on Debt 9,694 9,604 9,368 9,090 9,278
Total Expense 68,774 73,883 79,396 85,308 87,499
Surplus / (Deficit) Before Reserve 117  (5,483 (1,555)  (1,369)  (949) 
Reserve - - - - 1,000
Surplus / (Deficit) 117  (5,483)  (1,555)  (1,369)  (1,949) 
Net Debt 132,647 138,557 140,662 142,961 146,362
Accumulated Deficit 118,705 124,188 125,743 113,053 115,002

Note: Starting in 2006-07 the Province's financial reporting has been expanded to include hospitals, school boards and colleges using one-line consolidation. Total expense prior to 2005-06 has not been restated to reflect expanded reporting.
* First-quarter fiscal forecast as at June 30, 2006.
Net debt is calculated as the difference between liabilities and financial assets. The annual change in Net Debt is equal to the Surplus/Deficit of the Province plus the change in tangible capital assets and the change in net assets of hospitals, school boards and colleges. Accumulated Deficit is calculated as the difference between liabilities and total assets including tangible capital assets and net assets of hospitals, school boards and colleges. The annual change in the Accumulated Deficit is equal to the Surplus/Deficit. For fiscal 2005-06, the change in the Accumulated Deficit includes the opening combined net assets of hospitals, school boards, and colleges that were recognized upon consolidation of these Broader Public Service (BPS) entities.

SELECTED ECONOMIC AND FISCAL STATISTICS
  2002-03 2003-04 Actual
2004-05
Interim
2005-06
Current*
Outlook
2006-07
Gross Domestic Product (GDP) at Market Prices**
   ($ Millions)
477,528 491,859 517,306 538,386 562,613
Ontario Population (000s) - July 1

12,102 12,260 12,407 12,541 12,696
Ontario Revenue as a per cent of GDP 14.4 13.9 15.0 15.6 15.4
Ontario Revenue Growth (%)

3.5 (0.7) 13.8 7.8 3.1
Ontario Total Expense as a per cent of GDP 14.4 15.0 15.3 15.8 15.6
Ontario Total Expense Growth (%)

4.0 7.4 7.5 7.4 2.6
Ontario Total Program Expense as a per cent of GDP 12.4 13.1 13.5 14.2 13.9
Ontario Total Program Expense Growth (%)

5.8 8.8 8.9 8.8 2.6
Ontario Interest on Debt as a per cent of Revenue 14.1 14.0 12.0 10.8 10.7
Ontario Interest on Debt as a per cent of Total Expense 14.1 13.0 11.8 10.7 10.6
Ontario Interest on Debt as a per cent of GDP

2.0 2.0 1.8 1.7 1.6
Ontario Surplus / (Deficit) as a per cent of GDP

0.0 (1.1) (0.3) (0.3) (0.3)
Net Debt per capita ($) 10,961 11,302 11,337 11,399 11,528
Net Debt as a per cent of GDP

27.8 28.2 27.2 26.6 26.0
Accumulated Deficit per capita ($) 9,809 10,130 10,135 9,015 9,058
Accumulated Deficit as a per cent of GDP 24.9 25.2 24.3 21.0 20.4

* First-quarter fiscal forecast as at June 30, 2006.
** Reflects Statistics Canada's revisions to the National Income and Expenditure Accounts, and the Ontario Economic Accounts.
Sources: Ontario Ministry of Finance and Statistics Canada.

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ECONOMIC PERFORMANCE

ONTARIO ECONOMIC OUTLOOK

Bar chart showing 2006 budget and average private-sector forecast.

Moderate economic growth is expected in 2006, with real GDP rising by 2.3 per cent, after an increase of 2.8 per cent in 2005. The slower rate of economic growth reflects the appreciation of the Canadian dollar, continuing high oil prices, higher interest rates and an easing in the pace of growth in the U.S. economy.

The average private-sector forecast for Ontario economic growth is 2.5 per cent in 2006, down slightly from 2.6 per cent at the time of the Budget.

ONTARIO REAL GROSS DOMESTIC PRODUCT (GDP) GROWTH CONTINUES

  • Ontario's real GDP grew by 0.4 per cent in the first calendar quarter of 2006. Growth was led by strong residential and business construction investment spending.

SOLID JOB CREATION IN 2006

  • Over the first six months of 2006, Ontario has gained 111,000 jobs compared to the same period last year, a 1.8 per cent increase. In June, Ontario gained 1,400 net new jobs, following strong increases in March (+31,200), April (+23,800) and May (+34,000). In June, the unemployment rate was 5.9 per cent, the lowest level in five years.

  • In 2005, Ontario added 81,200 net new jobs for a gain of 1.3%. Full-time employment dominated job gains in 2005 with 71,000 net new jobs (+1.4%), while part-time employment increased by 10,200 (+0.9%). The unemployment rate averaged 6.6% in 2005, the lowest annual level since 2001.

RETAIL SALES GROWING

  • Over the first five months of 2006, Ontario retail sales were 4.8 per cent ahead of the same period in 2005.

INFLATION REMAINS MODERATE

  • The Ontario annual CPI inflation rate was 2.4 per cent (year-to-year) in June, down from 2.8 per cent in May. In 2005, the Ontario CPI Inflation rate was 2.2 per cent, up from 1.9 per cent in 2004.

ACTIVITY IN HOUSING MARKET MODERATES

  • Over the first six months of 2006, Ontario housing starts were 4.9 per cent lower than during the same period last year.

  • Over the first five months of this year, Ontario home resales were 2.9 per cent higher than during the same period in 2005. The average price for a resale home was 6.9 per cent higher in May compared to a year ago.

MANUFACTURING SHIPMENTS WEAKER / INTERNATIONAL EXPORTS IMPROVE IN 2006

  • Over the first five months of 2006, Ontario manufacturing shipments were 2.8 per cent lower than the same period in 2005.

  • So far this year, Ontario international exports were up 1.0 per cent from the first five months of last year, while imports were up 1.5 per cent.

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ECONOMIC TRENDS AND PERFORMANCE

KEY ECONOMIC INDICATORS
(Per Cent Change from previous period, unless indicated otherwise)
    Annual Annual Quarterly
    2004 2005 05:1 05:2 05:3 05:4 06:1
Output (Seasonally Adjusted at Annual Rates)              
   Real GDP Ontario 3.1 2.8 1.6 1.8 1.8 1.2 1.7
   Nominal GDP Ontario 5.2 4.1 1.3 2.5 5.2 1.1 2.3
    Annual Annual Monthly 2006
    2004 2005 Feb Mar Apr May Jun
Other Indicators (Seasonally Adjusted)              
Labour Markets                
   Labour Force (Change in 000s)   99 74 (39) 27 29 14 5
   Employment (Change in 000s)   103 81 (17) 31 24 34 1
   Unemployment Rate (%)   6.8 6.6 6.2 6.1 6.2 5.9 5.9
Household Sector                
   Retail Sales   3.2 4.7 (2.3) 3.1 1.3 (1.9) N/A
   Housing Starts (000s)*   85.1 78.8 80.0 76.3 71.7 78.1 80.1
   MLS Home Resales**   7.0 (0.2) 7.0 8.2 (6.6) 2.2 N/A
Manufacturing Shipments   7.1 0.7 (1.2) 0.0 0.2 (1.6) N/A
   Transportation Equipment   5.2 (2.7) 1.3 (4.4) 0.8 (3.3) N/A
Consumer Price Index**   1.9 2.2 2.0 2.3 2.3 2.8 2.4

Sources: Statistics Canada, Ontario Ministry of Finance, Canada Mortgage and Housing Corporation, Canadian Real Estate Association and Ward's Automotive.

* Monthly housing starts are expressed at a seasonally adjusted annual rate.
** Per cent change from a year earlier.
N/A = Data not available.

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ONTARIO FINANCES
FINANCIAL TABLES

REVENUE
($ Millions)    2006-07 
Interim
2005-06
Budget
Plan
Current*
Outlook
In-Year
Change
Taxation Revenue        
Personal Income Tax 21,028 21,671 21,671 -
Retail Sales Tax 15,523 16,165 16,165 -
Corporations Tax 9,729 9,845 10,095 250
Employer Health Tax 4,205 4,314 4,314 -
Ontario Health Premium 2,427 2,551 2,551 -
Gasoline Tax 2,288 2,303 2,303 -
Fuel Tax 737 742 742 -
Tobacco Tax 1,408 1,485 1,485 -
Land Transfer Tax 1,141 1,125 1,125 -
Electricity Payments-In-Lieu of Taxes 940 790 790 -
Other Taxes 314 283 283 -
  59,740  61,274  61,524  250 
Government of Canada        
Canada Health Transfer (CHT) 7,139 7,619 7,619 -
Canada Social Transfer (CST) 3,318 3,420 3,420 -
CHST Supplements 584 - - -
Social Housing 531 530 530 -
Infrastructure Programs 289 359 359 -
Wait Times Reduction Fund 243 467 467 -
Medical Equipment Funds 194 - - -
Other Government of Canada 922 1,187 1,187 -
  13,220  13,582  13,582 
Income from Investment in Government Business Enterprises  
Ontario Lottery and Gaming Corporation 1,953 1,743 1,743 -
Liquor Control Board of Ontario 1,182 1,254 1,254 -
Ontario Power Generation Inc. and Hydro One Inc. 1,090 919 919 -
Other Government Enterprises (15) 4 4 -
  4,210  3,920  3,920 
Other Non-Tax Revenue        
Reimbursements 1,301 1,358 1,358 -
Electricity Debt Retirement Charge 1,018 1,027 1,027 -
Vehicle and Driver Registration Fees 1,010 1,021 1,021 -
Power Sales 961 988 988 -
Other Fees and Licences 534 556 556 -
Liquor Licence Revenue 495 453 453 -
Net Reduction of Power Purchase Contract Liability 396 412 412 -
Sales and Rentals 336 396 966 570
Royalties 175 243 243 -
Miscellaneous Other Non-Tax Revenue 543 500 500 -
  6,769  6,954  7,524  570 
Total Revenue 83,939  85,730  86,550  820 

* First-quarter fiscal forecast as at June 30, 2006.

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TOTAL EXPENSE
($ Millions)    2006-07
Ministry Interim
2005-06
Budget
Plan
Current*
Outlook
In-Year
Change
Agriculture, Food and Rural Affairs 863 880 880 -
One-Time and Extraordinary Assistance 277 16 16 -
Attorney General 1,291 1,301 1,301 -
Board of Internal Economy 163 169 169 -
Children and Youth Services 3,346 3,264 3,264 -
Citizenship and Immigration 94 91 91 -
Community and Social Services 6,745 7,045 7,045 -
Community Safety and Correctional Services 1,806 1,887 1,887 -
Culture 454 366 366 -
Democratic Renewal Secretariat 3 10 10 -
Economic Development and Trade 230 351 353 2
Education 467 438 438 -
School Boards 10,758 11,182 11,219 37
Teachers' Pension Plan (TPP) 295 408 408 -
Energy 207 229 242 13
Environment 302 302 302 -
Time-Limited Environmental Expense 25 - - -
Executive Offices 19 19 19 -
Finance - Own Account 1,226 1,060 1,167 107
Interest on Debt 9,090 9,429 9,278 (151)
Community Reinvestment Fund / Ontario Municipal Partnership Fund 708 731 731 -
Community Reinvestment Fund One-Time Transition Funding - - - -
Electricity Consumer Price Protection Fund - - - -
Power Purchases 961 988 988 -
Contingency Fund 50 995 1,331 336
Government Services 752 736 811 75
Pension and Other Employee Future Benefits 736 594 594 -
Health and Long-Term Care 19,157 20,328 20,328 -
Hospitals 14,061 14,713 14,713 -
Health Promotion 258 363 363 -
Intergovernmental Affairs 10 9 9 -
Labour 146 150 150 -
Municipal Affairs and Housing 904 693 693 -
Natural Resources 635 682 682 -
Northern Development and Mines 357 347 347 -
Office of Francophone Affairs 4 4 4 -
Public Infrastructure Renewal 49 114 114 -
Contingency Fund - 175 175 -
Research and Innovation 372 345 345 -
Secretariat for Aboriginal Affairs 49 21 21 -
Tourism 261 161 161 -
Training, Colleges and Universities 3,479 3,876 3,876 -
Colleges 1,258 1,359 1,359 -
Transportation 2,208 1,943 1,943 -
Move Ontario 1,232 6 6 -
Year-End Savings - (700) (700) -
Total Expense 85,308  87,080  87,499  419 

* First-quarter fiscal forecast as at June 30, 2006.
Starting in 2005-06 the Province's financial reporting has been expanded to include hospitals, school boards and colleges using one-line consolidation. As a result, these amounts reflect the net expense of these sectors.

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2006-07 INFRASTRUCTURE EXPENDITURES
($ Millions)  Total Infrastructure
Expenditures
2005-06 Interim
2006-07*
Investment in 
Capital Assets
Transfers and Other
Expenditures in
Infrastructure**
Total Infrastructure
Expenditures
Transportation        
Transit 1,649 546 397 943
Highways 1,253 1,295 116 1,411
Other Transportation 494 2 60 62
Health        
Hospitals 274 305 - 305
Other Health 180 32 172 204
Education        
School Boards 1,031 - 1,110 1,110
Colleges 44 13 - 13
Universities 86 - 27 27
Water/Environment 337 10 226 236
Municipal and Local Infrastructure 496 2 381 383
Justice 96 64 53 117
Other 497 275 232 507
Total†† 6,437  2,544  2,774  5,318 

* First-quarter fiscal forecast as at June 30, 2006, which is unchanged from the 2006 Budget.
** Mainly consists of transfers for capital purposes to municipalities and universities, expenditures for servicing capital-related debt of schools, and expenditures for the repair and rehabilitation of schools. These expenditures are included in the Province's Total Expenses in the Total Expense Table.
Municipal and local water and wastewater infrastructure investments are included in the Water/Environment sector.
††Total expenditures include $36 million in flow-throughs in Investment in Capital Assets (for provincial highways) and $208 million in flow-throughs in Transfers and Other Expenditures in Infrastructure ($31 million in Transportation, $26 million in Water/Environment, $150 million in Municipal and Local Infrastructure, and $1 million in Other Infrastructure).

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ONTARIO'S 2006-07 FINANCING PROGRAM

CONSOLIDATED PROVINCE AND ONTARIO ELECTRICITY FINANCIAL CORPORATION
($ Millions)
  Interim
2005-06
2006-07
Budget
Plan
Current*
Outlook
In-Year
Change
Deficit/(Surplus) 1,369 2,350 1,949 (401)
Adjustments for:        
Non-Cash Items Included in Deficit 3,904 1,058 1,058 -
Amortization of Major Tangible Capital Assets (2,092) (2,228) (2,228) -
Investment in Capital Assets 2,100 2,544 2,544 -
Debt Maturities 19,805 15,140 15,040 (100)
Debt Redemptions 1,134 700 900 200
Canada Pension Plan Borrowing (996) (351) (351) -
Increase/(Decrease) in Cash and Cash Equivalents (1,485) - - -
Decrease/(Increase) in Short-Term Borrowing (1,771) 1,371 1,371 -
Other Uses/(Sources) of Cash 1,879 247 224 (23)
Total Long-Term Public Borrowing Requirement 23,847 20,831 20,507 (324)

* First-quarter fiscal forecast as at June 30, 2006.

Borrowing Program Status (as at June 30, 2006)
($ Billions)
  Completed Remaining Total
Province 4.8 12.2 17.0
Ontario Electricity Financial Corporation 0.6 2.9 3.5
Total 5.4 15.1 20.5

Numbers may not add due to rounding.

  • Long-Term Public Borrowing undertaken as at June 30, 2006, was $5.4 billion as follows:
  ($ Billions)
Ontario Savings Bonds 1.4
Domestic Issues 2.8
Global / US Dollar Issues 1.1
Euro Medium Term Notes 0.1
Total 5.4
  • The $100 million decline in Debt Maturities is mainly due to debt issues with callable or extendible features that were shifted into future years.

  • The $200 million increase in Debt Redemptions is a result of higher than forecast redemptions of Ontario Savings Bonds (OSBs) in June.
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