Historical Perspective on British Columbias Credit Rating Presentation to Financial Management Institute June 18, 2008

Outline Who are credit rating agencies? Claim to power and influence What is a credit rating? What factors comprise a government rating? Differences among rating agencies British Columbias recent experience Challenges posed by credit rating agencies 2

Who are credit rating agencies? Three major agencies History Business model Issuer-pay business 3

What is their claim to power and influence in the financial community? Globalization, new financial products Defines issuer access to investors Materially influences borrowing costs Measure of reputation and standing Oligopoly among a few agencies Light regulation 4

What is a credit rating? It is not investment advice It is not a market valuation It is an assessment of credit risk Incorporates assessments of historical data and performance and future outlook 5

Weightings Assigned to Credit Factors by Moodys (Regional and Local Governments Outside the US) Source: Moodys International, Rating Methodology Advanced Industrial Countries: Operating Environment 50.00% Institutional Framework 10.00% Financial Position & Performance 10.00% Debt Profile 10.00% Governance & Management Factors 10.00% Economic Fundamentals 10.00% 6

Differences among rating agencies? Rating methodology Subjective assessment Treatment of Key Factors 7

Moodys:AAA Standard & Poors:AAA Dominion Bond Rating Service:AA(high) Fitch RatingsAAA British Columbias Current Credit Ratings 8

AAA AA+ AA AA- A+ Credit Rating History (Moodys, S&P, DBRS) Source: Ministry of Finance 9

- Weak economic performance - Widening budgetary imbalance expected (expansionary fiscal policy) - Deferral of balanced budget - Fiscal targets not being met - High relative taxes and spending pressures reduce fiscal flexibility - Debt to GDP almost doubled over seven years Source: Credit rating agency credit reports on British Columbia Factors that lead to downgrades:

Factors that lead to upgrades: Track record of surpluses and lower debt burden (larger than expected) - Expectations of future balanced budgets or surpluses - Expectation of a decline in the debt burden - Fiscal room to manoeuvre in case of unanticipated fiscal pressures - Solid economic performance despite strong headwinds in some years - Competitive provincial tax system - Favourable assessment of economic forecasts - Public sector pension plan governance - Enhanced transparency - Successful management of infrastructure procurement - Access to liquidity (eg. domestic and international investors) Source: Credit rating agency credit reports on British Columbia 11

AAA AA+ AA AA- A+ Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/ /11 Relationship Between GDP Growth & Credit Rating Adjustments (Estimate) (As at March 31) AAA AA+ AA AA- A+ 12

Relationship Between Personal Income Per Capita Growth & Credit Rating Adjustments Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11 (Estimate) AAA AA+ AA AA- A+ (As at March 31) 13

Relationship Between Personal Income Per Capita & Credit Rating Adjustments AAA AA+ AA AA- A+ Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11 (Estimate) (As at March 31) 14

Relationship between Tax-payer Supported Debt Service Cost as a % of Tax-payer Supported Revenue & Credit Rating Adjustments AAA AA+ AA AA- A+ Source: BC Public Accounts ( ) & Budget and Fiscal Plan 2008/09 to 2010/11 (Estimate) (As at March 31) 15

Relationship Between Tax-payer Supported Debt as a % of GDP & Credit Rating Adjustments AAA AA+ AA AA- A+ (Estimate) Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11 (As at March 31) 16

Source: BC Public Accounts ( ) & Budget and Fiscal Plan 2008/09 to 2010/11 AAA AA+ AA AA- A+ (Estimate) Relationship Between Taxpayer Supported Debt as % of Total Revenue & Credit Rating Adjustments (As at March 31) 17

Relationship Between Tax-payer Supported Debt Per Capita & Credit Rating Adjustments Source: BC Public Accounts ( ) & Budget and Fiscal Plan 2008/09 to 2010/11 (Estimate) AAA AA+ AA AA- A+ (As at March 31) 18

Relationship Between Consolidated Surplus/Deficit & Credit Rating Adjustments Source: 2007 British Columbia Financial & Economic Review & Budget and Fiscal Plan 2008/09 to 2010/11 (Estimate) AAA AA+ AA AA- A+ (As at March 31) * Excludes financial position of Schools, Universities, Colleges and Hospitals prior to 1998/99 19

Actual vs Budgeted Surplus/Deficit (As at March 31) AAA AA+ AA AA- A+ Standard & Poors Upgrades: Source: Ministry of Finance 20

Other Credit Factors Liquidity Debt Management Pension fund management Transparent reporting Consistent track record 21

Managing Credit Rating Agency Relationships No surprises Consistent track record Annual reviews and routine communications 22

Borrowing Spreads - BC relative to Ontario (10 Year Bond) Standard & Poors Upgrades: Source: Ministry of Finance 23

Standard & Poors Upgrades: Source: Ministry of Finance Borrowing Spreads - BC relative to Ontario (30 Year Bond) 24

Challenges Posed by Credit Rating Agencies Most acute in corporate sector Business Model Blurred Accountabilities Regulatory Oversight Generally a lagging indicator Sophisticated investors look for alternatives 25