Standard & Poor’s Ratings Services says that it expects an upcoming opinion from Ontario’s auditor to recommend a change in the province’s accounting for $3.9 billion in one-time revenues. But S&P says the province’s ratings or outlook will be unaffected.

The provincial auditor is expected to provide an opinion on the province’s fiscal 2005 Public Accounts to be released in the fall, including the treatment of the about $3.9 billion in one-time revenues that arose from the elimination of the liability associated with non-utility generation power purchase agreements. The main issue pertains to the government’s decision to recognize the entire $3.9 billion as revenue in this fiscal year (ending March 31), therefore reducing the province’s expected deficit for 2005 to about $2.2 billion.

“We expect that the auditor likely will recommend a multiyear recognition of these revenues,” S&P says. “If this is the case, the result would be to increase Ontario’s reported deficit for fiscal 2005 by $3.9 billion (to about $6 billion from $2.2 billion). For fiscal years 2006-2008, however, the reported deficits would be lower than forecasted in the fiscal 2005 budget as a result of the gradual inclusion of these revenues in these years.”

“In our opinion, whatever accounting treatment is adopted, the effect on the province’s credit quality should be neutral,” it says, explaining that Standard & Poor’s typically excludes the influence of accruals and nonrecurring cash revenue items (such as asset sales) from reported revenues.

“In our most recent review of Ontario’s finances, we excluded the entire $3.9 billion in revenues from the province’s estimated fiscal 2005 revenues and estimated the province’s deficit (on a cash basis and including capital spending) in fiscal 2005 to be $5.9 billion or 7.9% of revenues,” it says. “The potential restatement of fiscal 2005 to fiscal 2008 revenues will not have an effect on Standard & Poor’s adjusted figures, since they are already excluded from our estimates for fiscal 2005 revenues and, therefore, will be credit neutral.”

“Nevertheless, the province’s credit quality could be affected in the medium term by any slippage in underlying financial performance,” it cautions. “The fiscal 2005 third-quarter update (released on Feb. 14, 2005) revealed that total provincial revenues remained slightly above budgetary projections for this period; however, most of the upside in revenues came from additional federal health care funding received in fiscal 2005. Tax revenues have, in fact, been softer than expected; mostly due to weaker than budgeted retail sales and corporate tax revenues.”

Standard & Poor’s says it continues to believe that the province will require significant revenue growth (about 7.3% increase) or expenditure reductions in fiscal 2006 (regardless of the accounting treatment of the one-time revenues) to remain on track with the province’s projected deficit of $2.1 billion in that fiscal year and achieve budgetary balance by fiscal 2008.