2016 Ontario Budget
Chapter III: Economic and Fiscal Outlook

Section C: Borrowing and Debt Management

Ontario conducts its borrowing program responsibly to better protect the essential public services Ontarians rely on by minimizing interest on debt costs. To date, $28.4 billion, or 94 per cent, of this year’s long-term public borrowing requirement has been completed. The Province’s interim borrowing requirement in 2015–16 has decreased by $1.0 billion compared to the 2015 Budget forecast.

Net debt, as of March 31, 2016, is forecast to be $296.1 billion, $2.8 billion lower than forecasted in the 2015 Budget. Net debt was $284.6 billion as of March 31, 2015. The net debt-to-GDP ratio is forecast to peak at 39.6 per cent in 2015–16, remain level in 2016–17, and decline to 38.9 per cent in 2017–18 and 38.5 per cent in 2018–19. The government continues to maintain a target of reducing the net debt-to-GDP ratio to its pre-recession level of 27 per cent.

Green Bonds are an important tool to help Ontario finance transit and other environmentally friendly projects across the province. As the first Canadian province to issue Green Bonds, Ontario is leading the way in establishing and developing a Canadian-dollar Green Bond market with global investor participation. The Province issued its second Green Bond in January 2016.

Long-Term Public Borrowing

The Province’s deficit for 2015–16 is now projected to be $5.7 billion, compared to the 2015 Budget forecast of $8.5 billion. The total funding requirement for 2015–16 is now forecast at $4.0 billion lower than the 2015 Budget forecast. The Province’s total long-term borrowing in 2016–17 is forecast to be $26.4 billion, $3.7 billion lower than the amount borrowed in 2015–16, and $4.0 billion less than forecast for 2016–17 in the 2015 Budget.

The government will seek approval from the legislature for borrowing authority to meet the Province’s requirements, and will propose amendments that, if passed, would streamline the administration of the Province’s borrowing program.

TABLE 3.27 Borrowing Program and Medium-Term Outlook: Province and Ontario Electricity Financial Corporation
($ Billions)
  2015–16
2015 Budget
2015–16
Interim
2015–16
In-Year Change
2016–17 2017–18 2018–19
Deficit/(Surplus) 8.5 5.7 (2.8) 4.3 0.0 0.0
Investment in Capital Assets 9.1 8.5 (0.6) 11.2 12.4 14.2
Non-Cash Adjustments (4.9) (3.1) 1.8 (5.8) (6.1) (6.3)
Loans to Infrastructure Ontario 1.1 0.8 (0.2) 0.3 0.1
Other Net Loans/Investments 1.0 (0.2) (1.2) (0.9) (0.8) (1.2)
Debt Maturities 21.0 21.1 0.1 21.5 17.5 22.1
Debt Redemptions 0.2 (0.2) 0.1 0.1 0.1
Hydro One Special Dividend (0.8) (0.8)
Total Funding Requirement 35.9 31.9 (4.0) 30.3 23.3 28.8
Canada Pension Plan Borrowing (0.1)
Decrease/(Increase) in Short-Term Borrowing (1.0)
Increase/(Decrease) in Cash and Cash Equivalents 3.5 3.5 (2.7)
Preborrowing from 2014–15 (4.8) (5.3) (0.5)
Total Long-Term Public Borrowing 31.1 30.1 (1.0) 26.4 23.3 28.7
Note: Numbers may not add due to rounding. 

To date, $28.4 billion of this year’s long-term public borrowing has been completed.

Approximately 78 per cent of this year’s borrowing to date has been completed in Canadian dollars, primarily through syndicated issues and a $750 million Green Bond issue. Given the strength of demand Ontario has experienced in the Canadian-dollar market, the Province raised its Canadian-dollar borrowing target to at least 75 per cent in 2015–16 in the 2015 Budget, up from the previous target of 70 per cent. The target for 2016–17 remains at 75 per cent.

About $6.3 billion, or 22 per cent, of borrowing has been completed in foreign currencies. The U.S.-dollar market has remained an important source of funding for Ontario this year, with $6.0 billion issued in U.S. dollars. The remaining foreign currency borrowing has been completed in euros and Australian dollars.

Ensuring Preferred Market Access

The Province regularly accesses borrowing opportunities in currencies other than Canadian dollars to diversify its investor base. This helps reduce Ontario’s overall borrowing costs and ensures that the Province will continue to have access to capital if market conditions become more challenging.

Green Bond Update

On January 22, 2016, Ontario successfully launched its second Canadian-dollar Green Bond of $750 million.

As the first Canadian province to issue Green Bonds, Ontario is leading the way in establishing and developing a Canadian-dollar Green Bond market with global investor participation. In 2014, Ontario’s inaugural Green Bond issue attracted investors from the United States, Europe and Asia, bringing new international buyers to the Canadian-dollar market. There was strong international interest for Ontario’s second Green Bond, with 35 per cent of investor participation from the United States and Europe. The issue was also made available to retail investors through Canadian financial institutions.

Green Bonds are an important tool to help Ontario finance transit and other environmentally friendly projects across the province. Eight eligible projects have been selected to receive funding from the second Green Bond:

  • Metrolinx — Eglinton Crosstown Light Rail Transit (LRT);
  • Metrolinx — vivaNext Bus Rapid Transit;
  • Metrolinx — Regional Express Rail;
  • Sheridan College Hazel McCallion Campus Expansion — Mississauga;
  • St. Joseph’s Health Care Hamilton — West 5th Campus;
  • St. Joseph’s Health Care London — London and St. Thomas;
  • Waypoint Centre for Mental Health Care — Penetanguishene; and
  • Centre for Addiction and Mental Health — Queen Street Site, Phase 1B.

The Eglinton Crosstown LRT was selected as the first project to receive Green Bond funding for $500 million in 2014. To date, total Green Bond financing amounts to $1.25 billion, with up to $1.2 billion allocated to Metrolinx for clean transportation projects.

Term of Borrowing

Given the low interest rates experienced in recent years, Ontario has been proactive in extending the term of its borrowing program. Extending the term to maturity allows the Province to lock in low interest rates for a longer period, which reduces refinancing risks and helps offset the impact of expected higher interest rates on the Province’s future interest on debt (IOD) costs.

Going back to the beginning of fiscal 2010–11, Ontario has issued $53.5 billion of bonds with terms of longer than 30 years to lock in low rates. As a result, the weighted-average term to maturity of long-term Provincial debt issued has been extended significantly, from 8.1 years in 2009–10 to 14.0 years in 2015–16.

Interest on Debt Savings and Affordability

Interest on debt expense is projected to be $11,200 million for 2015–16, which is $210 million lower than forecast in the 2015 Budget, reflecting lower-than-forecast interest rates, the lower forecast deficit for 2015–16 and cost-effective debt management. Interest on debt expense is forecast to be $11,756 million in 2016–17 and $12,453 million in 2017–18 — $682 million and $750 million lower, respectively, than forecast in the 2015 Budget.

These savings continue a trend that has been in place since 2010, through a combination of lower deficits and borrowing requirements, and lower-than-forecast interest rates. Interest on debt savings over the period to balance now total $22.4 billion relative to the 2010 Budget forecast.

Chart 3.29 illustrates how the savings on IOD have lowered a key measure of the affordability of debt. The 2010 Budget forecast that, by 2016–17, the Province would have to spend 11.7 cents of every revenue dollar received on interest. The current forecast is 2.7 cents lower, at 9.0 cents of interest costs for every dollar of revenue. This ratio is lower than it was in the 1990s and 2000s, and is forecast to remain lower through the outlook period in 2018–19.

For the 12 years commencing in 1992–93, average IOD-to-revenue was 14.2 per cent, declining to 9.2 per cent over the next 12 years.

Ensuring Adequate Liquidity Levels

Ontario actively manages its financial obligations through the maintenance of a liquid reserve portfolio and the use of short-term borrowing. The Province increased its level of unrestricted liquid reserves following the financial crisis in 2008–09.

The Province’s short-term borrowing program in the Canadian- and U.S.-dollar money markets is relatively small, accounting for only 6.4 per cent of Ontario’s debt. The unused short-term borrowing capacity that this leaves, combined with the high levels of unrestricted liquid reserves, ensures that the Province will always have adequate liquidity to meet its financial obligations.

Net Debt-to-GDP

Ontario’s net debt is the difference between total liabilities and total financial assets. It is projected to be $296.1 billion as of March 31, 2016, down from the net debt projection of $298.9 billion in the 2015 Budget.

Accumulated deficit is projected to be $193.4 billion as of March 31, 2016, compared to a projection of $194.8 billion in the 2015 Budget. The projected difference of $102.7 billion between net debt and accumulated deficit is due to the Province’s consistent level of investment in infrastructure, as shown by the increase in tangible capital assets.

Ontario’s net debt-to-GDP ratio is forecast to peak in 2015–16, remain level in 2016–17 and begin to decline in 2017–18. The government continues to maintain a target of reducing the net debt-to-GDP ratio to its pre-recession level of 27 per cent.

In 2016–17, each $780 million in net debt impacts net debt-to-GDP by one-tenth of one per cent.

Total Debt Composition

Total debt consists of bonds issued in the public capital markets, non-public debt, treasury bills and U.S. commercial paper. Total debt, which represents all borrowing without offsetting financial assets, is projected to be $325.3 billion as of March 31, 2016.

Public debt, as of March 31, 2016, is projected to be $313.4 billion, primarily consisting of bonds issued in the domestic and international public markets in seven currencies. Ontario also has $11.9 billion outstanding in non-public debt issued in Canadian dollars. Non-public debt consists of debt instruments issued mainly to the Canada Pension Plan Investment Board. This debt is not marketable and cannot be traded.

Canadian-dollar denominated debt represents 81 per cent of the total debt projected as of March 31, 2016.

Cost of Debt

The interest rate that Ontario pays on its debt has declined steadily since 1990–91, when the effective interest rate (on a weighted-average basis) on total debt was 10.9 per cent. As of March 31, 2016, it is forecast to be 3.6 per cent, lower than the 3.7 per cent from March 31, 2015.

For 2016–17, the impact of a one percentage point change in interest rates on IOD would be approximately $350 million for the Province.

Limiting Risk Exposure

Ontario limits itself to a maximum net interest rate resetting exposure of 35 per cent of debt issued for provincial purposes and a maximum foreign exchange exposure of five per cent of debt issued for provincial purposes. As of December 31, 2015, the values for net interest rate resetting exposure and foreign exchange exposure were 10.1 per cent and 0.3 per cent, respectively. All exposures remained well below policy limits in 2015–16.

The Province’s Use of Derivatives

To seek the most cost-effective means of meeting its borrowing requirements, Ontario issues debt in foreign currencies, as well as floating rate debt in both domestic and international markets. To mitigate the risk arising from foreign exchange and interest rate movements, the Province uses derivatives, a type of financial contract, to limit its exposure to both of these variables. Foreign currency swaps and forwards are used to convert foreign currency exposure into Canadian-dollar exposure, while interest rate swaps ensure interest payments on the Province’s floating rate debt remain constant.

TABLE 3.28 Consolidated Derivative Portfolio Notional Value1
($ Billions)
  Total Interest
Rate
Swaps
Cross-
Currency
Swaps
Forward
Foreign
Exchange
Contracts
Futures Swaptions
2014–15 $198.1 112.5 53.2 32.0 0.5
Interim 2015–16 $181.0 100.5 48.6 30.9 0.4 0.5
1 Notional amounts represent the volume of outstanding derivative contracts and are not indicative of credit risk, market risk or actual cash flows.
Note: Numbers may not add due to rounding.
Source: Ontario Financing Authority.

The government proposes to introduce amendments to the Securities Act that, if passed, would provide that certain rules relating to the publication of derivatives trades would not apply to the Crown and certain Crown agencies. These amendments would maintain a uniform approach in their treatment of federal, provincial and territorial governments to accommodate the unique requirements of Crown entities’ transactions in the Canadian over-the-counter derivatives market. These amendments would allow the Province to provide transparency to regulatory authorities, while enabling Ontario, and other Canadian governments, to continue to minimize their overall cost of borrowing.

Reducing Ontario’s Electricity Sector Stranded Debt

Ontario Electricity Financial Corporation (OEFC) estimated results for 2015–16 show an estimated excess of revenue over expense of more than $3 billion, which would reduce OEFC’s unfunded liability (or “stranded debt of the electricity sector”) from $8.2 billion as of March 31, 2015, to below $5 billion as of March 31, 2016. This would be the twelfth consecutive year of stranded debt reduction.

The estimated 2015–16 results reflect the upfront impacts of broadening the ownership of Hydro One through an initial public offering (IPO). This includes the OEFC receiving $2.6 billion in departure tax and about $200 million in one-time additional payments in lieu of taxes (PILs), as Hydro One exited the PILs regime and will no longer pay corporate tax PILs to the OEFC. The upfront impact of the departure tax and one-time PILs payments on the OEFC’s unfunded liability will be fully offset over time by their impact on reducing dedicated revenues to the OEFC in 2015–16, and in future years related to Hydro One net income.

Projected 2016–17 OEFC results are an excess of revenue over expense of about $0.6 billion.

Future OEFC results are subject to uncertainty, which depend on the financial performance of Ontario Power Generation, Hydro One and municipal electricity utilities, and other factors such as interest rates and electricity consumption.

Prudent Management of the Electricity Sector Debt

The government dedicates revenues it receives from the electricity sector to OEFC. All OEFC revenues, including the debt retirement charge (DRC) paid by electricity users, are used to service and retire its debt and other obligations, as provided for under the Electricity Act, 1998. The Auditor General’s 2011 Annual Report confirmed that the DRC is used exclusively by the OEFC to meet its mandate, as provided for under the Act. The Auditor General audits OEFC’s annual financial statements and has provided an unqualified opinion every year since the initial 1999–2000 financial statements.

Electricity sector reforms have led to 12 consecutive years of stranded debt pay-down, as projected for year-end 2015–16. This has allowed the government to follow through on its commitment to reduce electricity cost pressures for residential users by eliminating the DRC as of January 1, 2016, and for commercial, industrial and all other users as of April 1, 2018.

The OEFC will continue to receive DRC revenues in respect of electricity consumption prior to April 1, 2018, thus achieving a balance between paying down the electricity sector stranded debt and mitigating cost pressures. The fixed end date provides certainty to commercial, industrial and other non-residential electricity users, and helps them more effectively plan their business and investment decisions.

Following the end of the DRC, the remaining stranded debt will be serviced and paid down by the OEFC’s other dedicated revenues, such as PILs, the amount equal to Hydro One Inc.’s provincial corporate income taxes, and the gross revenue charge paid to the OEFC. The OEFC will continue to report annually on its revenue sources and expenses, and on the stranded debt.

The government is committed to using proceeds related to the book value of shares sold from broadening ownership in Hydro One to pay down electricity sector debt. These proceeds and the pre-IPO special dividend of $800 million will allow the Province to pay down its debt and other payables to the OEFC and contribute towards the Province’s targeted $5 billion debt pay-down.

As part of the Budget Measures Act, 2015, the Electricity Act, 1998, was amended to provide for payments to the OEFC equal to the Provincial corporate taxes paid by Hydro One Inc. These amounts will contribute to servicing and paying down stranded debt, as will financial benefits provided to the OEFC as a result of Hydro One share offerings, including the November 2015 IPO, in accordance with section 50.3 of the Electricity Act, 1998.

Consolidated Financial Tables

TABLE 3.29 Net Debt and Accumulated Deficit
($ Millions)
Debt1 2011–12 2012–13 2013–14 2014–15 Interim
2015–16
Plan
2016–17
Publicly Held Debt - Bonds2 223,468 245,544 259,933 280,442 291,871 296,996
Publicly Held Debt - Treasury Bills 11,925 13,024 12,297 14,631 14,532 15,532
Publicly Held Debt - U.S. Commercial Paper2 4,701 6,611 8,657 6,304 6,403 6,403
Publicly Held Debt - Infrastructure Ontario (IO)3 1,854 1,909 1,603 950 300 300
Publicly Held Debt - Other 347 360 345 317 299 289
Total Publicly Held Debt 242,295 267,448 282,835 302,644 313,405 319,520
Non-Public Debt 14,983 13,617 12,923 12,316 11,928 11,628
Total Debt 257,278 281,065 295,758 314,960 325,333 331,148
Cash and Temporary Investments (21,180) (29,037) (24,303) (26,121) (24,237) (21,616)
Total Debt Net of Cash and Temporary Investments 236,098 252,028 271,455 288,839 301,096 309,532
Other Net (Assets)/Liabilities4 (14,862) (13,839) (18,354) (18,673) (18,848) (14,493)
Broader Public Sector (BPS) Net Debt 14,346 13,899 14,089 14,410 13,861 13,276
Net Debt 235,582 252,088 267,190 284,576 296,109 308,315
Non-Financial Assets5 (77,172) (84,956) (90,556) (97,065) (102,662) (110,562)
Accumulated Deficit 158,410 167,132 176,634 187,511 193,447 197,753
1 Includes debt issued by the Province and Government Organizations, including the OEFC.
2 All balances are expressed in Canadian dollars. The balances above reflect the effect of related derivative contracts.
3 Infrastructure Ontario’s (IO) interim 2015–16 debt is composed of Infrastructure Renewal Bonds ($300 million). IO’s debt is not guaranteed by the Province.
4 Other Net (Assets)/Liabilities include accounts receivable, loans receivable, advances and investments in government business enterprises, accounts payable, accrued liabilities, deferred revenue and capital contributions, pensions and other employee future benefits, and other liabilities.
5 Non-financial assets include the tangible capital assets of the Province and broader public sector.
Source: Ontario Ministry of Finance.
TABLE 3.30 Medium-Term Outlook: Net Debt and Accumulated Deficit
($ Billions)
  2017–18 2018–19
Total Debt 336.7 343.2
Cash and Temporary Investments (21.6) (21.6)
Total Debt Net of Cash and Temporary Investments 315.1 321.6
Other Net (Assets)/Liabilities (10.4) (5.3)
Broader Public Sector (BPS) Net Debt 12.3 10.5
Net Debt 316.9 326.8
Non-Financial Assets (119.2) (129.1)
Accumulated Deficit 197.7 197.7
Note: Numbers may not add due to rounding.

Chart Descriptions

Chart 3.25: 2015–16 Borrowing

To date, $28.4 billion of this year’s long-term public borrowing has been completed and consisted of $21.4 billion of Canadian dollar bonds, a $0.7 billion Canadian dollar Green Bond, $6.0 billion of U.S. dollar bonds, $0.1 billion of euros and $0.1 billion of Australian dollar bonds.

Return to Chart 3.25

Chart 3.26: Canadian Dollar and Foreign Currency Borrowing

To date, the Province’s 2015–16 borrowing program totalled $28.4 billion. $22.1 billion was borrowed in the Canadian dollar market and $6.3 billion was borrowed in foreign currencies.

Return to Chart 3.26

Chart 3.27: Weighted-Average Term of Borrowing in Years

The weighted average term of borrowing for 2015–16 was 14.0 years. The average term to maturity of new long-term Provincial borrowing has been extended significantly from 8.1 years in 2009–10.

Return to Chart 3.27

Chart 3.28: Interest on Debt: Budget Forecast versus Actual

Interest on debt expense in 2016–17 is now forecast to be $4.2 billion lower than the forecast contained in the 2010 Budget. Interest on debt savings over the period to balance now total $22.4 billion relative to the 2010 Budget forecast.

Return to Chart 3.28

Chart 3.29: Interest on Debt-to-Revenue Ratio

Interest on debt-to-revenue is forecast to be 9.0 per cent for 2016–17. This ratio is lower than it was in the 1990s and is forecast to remain lower through the outlook period in 2018–19.

Return to Chart 3.29

Chart 3.30: Average Unrestricted Liquid Reserve Levels

As of January 31, 2016, the average unrestricted liquid reserve for 2015–16 was $21.4 billion.

Return to Chart 3.30

Chart 3.31: Net Debt-to-GDP and Accumulated Deficit-to-GDP

The net debt-to-GDP ratio is forecast to peak at 39.6 per cent in 2015–16. The accumulated deficit-to-GDP is projected to be 25.9 per cent as of March 31, 2016.

Return to Chart 3.31

Chart 3.32: Total Debt Composition as of March 31, 2016

As of March 31, 2016, the Province’s total debt is projected to be $325.3 billion, and consists of $236.3 billion of Canadian dollar public bonds, $11.9 billion of Canadian dollar non-public debt, $14.5 billion of treasury bills, $6.4 billion of U.S. dollar commercial paper, $54.5 billion of foreign currency bonds and $1.7 billion yet to be borrowed.

Return to Chart 3.32

Chart 3.33: Effective Interest Rate (Weighted Average) on Total Debt

As of March 31, 2016, the effective interest rate (calculated as a weighted average) is forecast to be 3.6 per cent on the Province’s total debt, lower than the 3.7 per cent in 2014–15. The effective interest rate has been steadily decreasing from 10.9 per cent in 1990–91.

Return to Chart 3.33

Chart 3.34: Net Interest Rate Resetting and Foreign Exchange Exposure (as a Percentage of Debt Issued for Provincial Purposes)

The Province’s interim net interest rate resetting exposure, calculated as a percentage of the debt issued for Provincial purposes, was 10.1 per cent on December 31, 2015. This compares to 11.0 per cent as of March 31, 2015 and 11.0 per cent as of March 31, 2014. The interest rate exposure limit is set at
35 per cent. The Province’s interim foreign exchange exposure, calculated as a percentage of the debt issued for Provincial purposes, was 0.3 per cent as of December 31, 2015. This is unchanged from the 0.3 per cent as of March 31, 2015 and lower than the 0.4 per cent as of March 31, 2014. The foreign exchange exposure limit is set at five per cent.

Return to Chart 3.34