The next provincial government faces two enormous fiscal time bombs, cynically manufactured by the Liberals in the name of so-called balanced budgets and maintaining a triple-A credit rating.
First is BC Hydro whose revenues do not cover their costs. The Liberals kept the rates low given the looming election; consequently, Hydro was forced to borrow. In 10 years, Hydro’s debt went from $6 billion to $20 billion, and that doesn’t include any borrowing for Site C — yet.
Every department of the B.C. government, and every Crown-owned firm, operates under Canadian accounting rules except for BC Hydro.
When Canadian accounting rules came under the International Financial Reporting Standards a few years ago, the pension deficit Hydro experienced as a consequence of the 2008 recession had to be accounted for as a loss in the year it happened, which meant no dividend.
So the government changed the rules, to a more accommodating U.S. standard.
The government also arranged that revenues which might be received several years from now, if the BC Utilities Commission approves — which it hasn’t — be counted immediately, contributing to a fictional
And from that “profit,” the government extracted dividends to permit the budget to balance. This manufactured profit — remember, their costs exceed their revenues, also by government order — comes after Hydro has already paid “water rentals” to the province for the water that flows through their dams. Kind of like taxing gravity.
Even the laxer standard requires that the deferral accounting practices of the provincial government had to be approved by an impartial, arm’s-length regulator. That, in turn, required yet another change of rules dropping the requirement of regulatory approval. Henceforth, any practice convenient for the electoral prospects of the government was miraculously legal.
The upshot is that BC Hydro’s pension account is $1.2 billion below what is required for actuarial solvency, the deferral accounts have grown to several billion, and the total debt is over $20 billion. About $2 billion of that will have to be paid down in the next fiscal year. BC Hydro has asked the BC Utilities Commission for an unprecedented 12 years to catch up on its pension liability.
The Insurance Corporation of B.C. (ICBC) is another story of public assets plundered in the name of a balanced budget and that cherished credit rating.
Financial regulators have set a standard that says an insurance company must hold reserves to pay claims equal to 130 per cent of its outstanding liabilities.
ICBC’s reserves have been diverted by the government.
The corporation needs a cool $1 billion in cash from its shareholder, the provincial government immediately, or it must raise its premiums by about 40 per cent.
By law, automobile owners and drivers must use ICBC for basic insurance. Thus, as driver or taxpayer, you and I will get to pay the bill.
But back to BC Hydro. How does the government find the funds needed to restore its devastated balance sheet?
First, immediately shutting down the unnecessary Site C would stop much future bleeding.
Second, BC Hydro’s capital expenditures include about a billion a year for new power, over and above the amount needed to sustain existing facilities. Stop that.
Third, many agreements with Independent Power Producers that forced Hydro to pay non-market prices for power are in default. Cancelling these contracts would yield substantial savings.
Fourth, allow Hydro to charge rates equal to their costs and if the rate shock is unbearable, transfer some of the debt to the province.
Even more importantly, both BC Hydro and ICBC need professional, non-political directors and senior management and they need them now.
A postscript about our triple-A rating. The fact that credit rating agencies are paid by the issuers of debt, not the hapless buyers, means that their analyses are suspect.
I predict they will wait until the NDP are installed before lowering our rating, even though the financial damage was done by its predecessor government.
David Bond is an author and retired bank economist. Email: firstname.lastname@example.org.