DBRS Comments on New Brunswick’s 2015-16 Results and Impact of Accounting Changes on Debt

DBRS Limited (DBRS) has today commented on the Province of New Brunswick’s (the Province or New Brunswick) recently released 2015-16 Public Accounts, which show a modest improvement in fiscal performance; however, accounting changes related to the recognition of pension plan obligations and the consolidation of not-for-profit nursing homes have led to a higher debt burden. DBRS currently rates the Province at A (high) and R-1 (middle) with Stable trends and notes that these accounting changes do not alter the medium-term outlook for New Brunswick’s credit profile.

For the year ended March 31, 2016, final results, including accounting changes noted below, point to a DBRS-adjusted debt burden of 43.9% of gross domestic product (GDP) compared with 41.8% of GDP anticipated at the time of the last review. Despite the step-up in debt, DBRS’s medium-term expectations have not changed. DBRS continues to expect a gradual improvement in fiscal results and a stabilization of the debt-to-GDP ratio just above 44% in 2017-18; however, should the economy underperform expectations or fiscal targets prove challenging to achieve, this would present downside risks to the ratings.

The 2015-16 Public Accounts, released on September 30, 2016, show that fiscal performance exceeded expectations. For the year ended March 31, 2016, the Province reported a deficit of $260.5 million compared with an estimated shortfall of $466.4 million at the time of DBRS’s last review in April 2016. The bulk of this improvement is the result of a $100 million contingency reserve that was not required. In addition, after accounting for the impact of consolidation changes, revenues were largely on track with plan while spending was lower. After making adjustments to recognize capital spending as incurred rather than as amortized, this equates to a DBRS-adjusted shortfall of approximately $405 million, or 1.2% of GDP.

In recent years, the Province has made substantive changes to its primary public-sector pension plans to address concerns around longer-term sustainability. Most significantly, the Province converted them to a shared-risk, or target-benefit, model from the traditional defined-benefit model. The effect of these changes has been to provide greater certainty and predictability to annual pension expenses and to reduce the pension-related risks borne by taxpayers. Notwithstanding that the plan structures did not change in 2015-16, the Province has revised its accounting treatment for the plans after receiving a qualified audit opinion in 2014-15. New Brunswick is now using defined-benefit accounting instead of defined-contribution accounting as used in the previous year, resulting in a $220 million increase in pension liabilities and a corresponding increase in DBRS-adjusted debt. As noted in DBRS’s April 11, 2016, rating report on the Province, the Public Sector Accounting Board is undertaking a review of pension accounting standards with an emphasis on seeking agreement about how to account for hybrid pension plans. A resolution is not expected for several years.

In addition to the pension plan accounting change, the Province now includes not-for-profit nursing homes in the government reporting entity. The effect of this change has been an increase to both revenues and expenditures as well as the recognition of $448 million in third-party mortgages, which has resulted in a corresponding increase in the DBRS-adjusted debt burden. In practice, third-party nursing home debt was already being serviced through the Province’s nursing home funding model. To DBRS’s knowledge, other provinces do not consolidate not-for-profit nursing homes, although it does appear that the Province exercises somewhat greater control over this sector relative to peers.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.

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