The Department of Finance, Liability Management and Treasury Services Division, serves as the treasury function for most of the government entity, including managing daily banking functions (bank transfers, short-term investing and borrowing, and banking relationships) and short-term invest-ments of special funds (sinking funds, Public Debt
Management Fund, Debt Retirement Fund, pension funds, and miscellaneous trust funds).
The Department of Finance is responsible for managing Nova Scotia’s gross financial market debt portfolio, which stood at
$13.2 billion as of March 31, 2005. Against this gross financial market debt are financial assets held in mandatory and discre-tionary sinking funds plus holdings of Municipal Finance Corporation debt. These assets total $3.0 billion, resulting in a net debt of $10.2 billion. The management of this net finan-cial market debt position consists of executing the borrowing program, investing sinking funds and the Public Debt
Management Fund (PDMF), and where efficient to do so, exe-cuting derivative transactions.
The government’s budgetary policy sets the context for trea-sury management operations. The fiscal context for debt man-agement is provided in the Budget Address Fiscal Plan. The 2005–2006 budget shows that the government intends to have balanced budgets in the following four years. The Provincial Finance Act requires that the government table balanced bud-gets; and in the event of a deficit the government must take certain remedial actions.
In the upcoming year, the province will see a significant decline in debt outstanding in financial markets. On January 28, 2005, the Province of Nova Scotia reached an agreement in principle with the Government of Canada, subject to new fed-eral legislation, that ensures that the province will be the pri-mary beneficiary of its offshore resource revenues. Under the Offshore Offset Agreement, Nova Scotia will receive 100 per cent protection from equalization “clawbacks” for eight years, as long as the province receives equalization entitlements. The agreement, to 2012, is worth an estimated $1.1 billion to Nova Scotia, and the province will receive an up-front payment of
$830 million. In addition, this agreement provides for a fur-ther eight-year extension as long as Nova Scotia still qualifies for equalization and per-capita net debt does not become lower than that of at least four other provinces.
The $830 million to be paid under the Offshore Offset
Agreement will be applied to the net debt as soon as funds are received in the coming months. These monies will pay down existing provincial debt outstanding in financial markets and will reduce debt-servicing costs.
The receipt of the above $830 million does not have an imme-diate impact on net direct debt, the more commonly used mea-sure of provincial debt. The budget and Public Accounts, col-lectively referred to as financial statements or “books” of the province, are presented on a full accrual basis. In contrast, Treasury Management is the cash side of government opera-tions, and in this context the “borrowing requirements” are a cash flow measure, representing actual cash transactions relat-ed to the current, past, and future budgetary transactions, as well as the cash flow implications of non-budgetary transac-tions, such as capital advances, some contributions to pension plans, and net acquisition of tangible capital assets. Under the full accrual basis of accounting, revenues and expenditures are recorded when they are incurred, regardless of when the cash flows occur. The Offshore Offset Agreement up-front payment
of $830 million will be recorded as deferred revenue and will be recorded in the fiscal year in which the revenue is “earned.”
This concept is discussed further in the Debt Reduction Plan.
In recent years, even with budgetary surpluses being recorded, the net direct debt of the province has increased marginally to
$12.38 billion at March 31, 2005. Additions to the net debt of the province have continued under generally accepted
accounting principles (GAAP) due to the treatment of the acquisition of tangible capital assets. In 2004–2005, govern-ment set aside an additional $60 million for debt reduction to provide flexibility in capital infrastructure investments in future years. Under that Strategic Infrastructure Investment program, an allocation of $60 million to the 2004–2005 annu-al surplus will provide for an increase in capitannu-al spending in 2005–2006 and 2006–2007 without negatively affecting the Debt Reduction Plan.
The province’s ratio of net direct debt to gross domestic product at market prices continues to decline, and it is forecast to stand at 41.0 per cent at March 31, 2005, down from 42.7 per cent a year earlier.
The province continues to communicate its improving fiscal position both to investors and to bond-rating agencies. In 2003 and 2004 the province’s credit rating was upgraded by all three major bond-rating agencies. The most recent upgrade in September 2004 by Moody’s Investors Services cited long-term improvements in the province’s debt indicators, economic gains of recent years, and the government’s commitment to balanced budgets and achieving a reduction in debt. In its rat-ing of the province in August 2004, Standard & Poor’s said the province’s risk and debt management programs are among the most conservative among its domestic peers.