OREANDA-NEWS. Fitch Ratings has affirmed the Province of British Columbia's Foreign and Local currency long-term Issuer Default Rating (IDR) at 'AAA' and short-term IDR at 'F1+'. Fitch also affirms the province's senior unsecured long- and short-term debt at 'AAA' and 'F1+', respectively. The Rating Outlook for the Long-term IDRs and long-term rating on the senior unsecured debt is Stable.

SECURITY
Senior, unsecured obligations of the province.

KEY RATING DRIVERS

BROAD, SLOWLY GROWING ECONOMY: British Columbia's diverse economy continues a slow recovery from the recession. Employment growth has been relatively flat in recent years and the provincial government is forecasting modest GDP growth, albeit below pre-recession growth rates. Prudently, the government's budget includes forecast allowances to offset potential revenue shortfalls should economic growth lag projections for continued slow growth.

COMMITMENT TO FISCAL BALANCE: British Columbia has returned to balanced fiscal operations after realizing deficits during the most recent economic downturn. The province is forecasting an C\$879 million surplus for the recently ended fiscal year, and its three-year fiscal plan projects modest and slowly increasing surpluses through fiscal 2018.

MANAGEABLE DEBT BURDEN: The province's debt burden remains manageable despite borrowing to cover operating deficits and provide for economic stimulus during the downturn and initial recovery. Importantly, the government remains committed to reducing debt levels, as was accomplished prior to the downturn, and projects that the taxpayer-supported debt-to-GDP ratio declined in fiscal 2015, after peaking in 2014.

RATING SENSITIVITIES
FUNDAMENTAL CREDIT CHARACTERISTICS: The rating is sensitive to shifts in the province's commitment to maintaining balanced fiscal operations over the fiscal plan outlook period and continued moderation of debt levels.

CREDIT PROFILE
British Columbia's 'AAA' rating primarily reflects conservative financial management practices resulting in stable fiscal performance and a well-managed liability profile. Provincial economic performance has been generally positive since the recession, though growth remains somewhat sluggish particularly in the labor market.

FISCAL DISCIPLINE YIELDS MODEST SURPLUSES
Fitch considers British Columbia's financial planning and controls to be strong and views them as key reasons for the timely return to fiscal balance following recession-driven operating deficits. The province is forecasting its second balanced budget in five years in fiscal 2015 (ended March 31). During the downturn, British Columbia closed fiscal 2010 with a deficit of C\$1.81 billion after five years of surplus operations. The province embarked on a plan to restore fiscal balance through a combination of expenditure controls and revenue measures. Most prominently, the province enacted multiple mandates guiding contract negotiations with unions to hold down labor costs, and also held annual healthcare expense growth at or below 6% beginning in fiscal 2010. Revenue measures included a temporary two year income tax hike on high income earners for 2014 and 2015.

As of February, the province anticipated ending fiscal 2015 with a sizable C\$879 million surplus, representing 1.9% of revenues, an increase from C\$353 million and 0.8% last year, and well ahead of the original budget goal of C\$184 million and 0.4%. Ministry estimates indicate the bulk of the over-performance is derived from one-time or unpredictable revenue gains in personal and corporate income collections and from the Insurance Corporation of British Columbia (ICBC), a crown corporation (self-supporting enterprise of the province). British Columbia anticipated using the over-performance primarily to build up its accumulated surplus and pay down direct operating debt.

In February, British Columbia's Minister of Finance tabled a fiscal 2016 budget that continues the trend of fiscal discipline with a projected C\$284 million surplus (0.6% of revenues), and improvement anticipated over the three-year financial plan period. In line with the province's conservative budgeting, the ministry views the large fiscal 2015 surplus as largely one-time in nature and projects much more modest surpluses in the budget plan. The budget also incorporates the expiration of a temporary personal income tax hike enacted in 2014. During fiscal 2016, the province estimates the temporary hike will generate C\$176 million, or a modest 2.2% of budgeted personal income tax revenues. Fitch views the province's estimate for 2% yoy growth in personal income tax revenues in fiscal 2017 despite the expiration as achievable.

By fiscal 2018, Finance Ministry projections indicate a C\$399 million surplus, or 0.8% of revenues. The budget includes continuation of key expense measures including holding average annual growth in healthcare expenditures to 2.8% over the three-year financial plan. Healthcare cost control is critical as this category consumes over 40% of provincial operating spending. British Columbia brought yoy health spending increases down to between 2-3% beginning in fiscal 2014. Specific cost-control measures included adjusting payment incentives to reduce the use of diagnostic tests and negotiating directly with providers for lower rates on those tests, and increasing use of generic drugs.

Another key factor in expense management is an Economic Stability Mandate governing new labor contracts. The mandate calls for a 5.5% general wage increase spread over five years, with the potential for additional raises tied to the province's economic performance. As of February 2015, the province reported that over 200,000, or over two thirds of its unionized public sector employees had tentative or ratified agreements under the new mandate. This includes the teachers union, which went on strike last fall before reaching agreement with the province.

Importantly, the budget continues British Columbia's practice of including built-in cushions in the form of expense contingencies and revenue forecast allowances. Total value of the contingencies at C\$1.15 billion over the three-year financial plan are minor relative to the total budgets, covering less than 1% each year. But they do provide some cushion in the event of unanticipated expenses or economic volatility.

Revenue forecast allowances alone are also modest at C\$950 million over the three-year plan. As an additional protection against revenue volatility, the Ministry of Finance built its budget on economic growth slightly below the views from its panel of independent economists, the Economic Forecast Council. Budgeted real GDP growth is 0.3 percentage points (pp) lower than the council's outlook for calendar year 2015, 0.4 (pp) lower than the outlook for 2016, and 0.2 (pp) lower for 2017 and 2018. Contingencies, forecast allowances, and conservative economic growth assumptions are all long-standing aspects of the government's budgetary planning supporting Fitch's positive assessment of British Columbia's fiscal management.

BROAD ECONOMIC BASE RECOVERING
British Columbia's overall economic profile continues to provide a solid and diverse revenue base, but growth remains slow and below the pre-recession pace. The province is a key component of Canada's overall economic profile with provincial real GDP (C\$215.2 billion in 2013) representing between 12% and 13% of national GDP. Distribution across sectors is very close to the national distribution, indicating a well-diversified economic base. While natural resources are critical for the province's vast interior, other sectors including financial activities and education and health services, which are based mainly in Vancouver and other urban areas, are significantly larger components of GDP.

Leading up to the recession, British Columbia's growth rate outpaced national trends and the downturn was somewhat less severe in the province than for the nation as a whole. But the province's recovery has been less robust with annual real GDP growth trailing national growth in 2010, 2011 and 2013. The Finance Ministry's forecast for 2014 of 2.2% would be a modest improvement from British Columbia's 2013 actual rate, though still well below pre-recession levels of 3%-5% in 2005 - 2007. Employment growth (measured by the labour force survey) remains tepid, increasing just 0.6% in 2014, in line with the national rate. Non-farm payroll growth was more positive with 1.6% growth in British Columbia versus 1.1% growth nationally.

The outlook for 2015 and 2016 is somewhat brighter with the ministry projecting real GDP growth of 2.3% and 2.4% in the province, ahead of its projections for Canadian GDP growth of 2% in both years. British Columbia's economic growth will depend partially on its international goods exports, which totaled C\$35.7 billion in 2014 (up from C\$33.4 billion and the highest level in at least a decade). The United States remains the dominant trading partner (50.3%), though the share has declined as Asian markets, particularly China, have become more important. The U.S. share declined from nearly 70% in 2001 while China's share increased to 17.9% from just over 2% in 2001.

Fitch views British Columbia's housing market as somewhat overvalued relative to our proprietary Sustainable Home Price Model, though Fitch views the economic risk as manageable for the province. Fitch's assessment is that BC has historically benefitted from a restricted land supply and high desirability given its favorable climate and coastal border. More recently, prices have been supported by an influx of foreign buyers, particularly from Asia, who have viewed the Canadian housing market as a safe haven for investment, increasing the speculative value of these properties without altering the traditional market dynamics. The province projects moderation in the local housing market with a slowed rate of growth in new housing starts.

Given the province's sluggish pace of economic growth (particularly in employment) and the potential for a housing market correction based on Fitch's assessment of prices relative to long-term market fundamentals, the agency will continue to monitor British Columbia's economic performance over the near term. The forecast allowances provide a small, but important, cushion in the event economic growth stalls. Fitch also anticipates the province would take quick budgetary action to respond to significant revenue weakness beyond the allowances.

WELL-MANAGED DEBT PROFILE
British Columbia's debt position remains manageable, with significant debt paydowns in the middle part of the last decade, and compares favorably to the other Canadian provinces. Borrowing and debt levels increased during the recession and initial recovery for deficit financing and economic stimulus purposes. The province expects taxpayer-supported debt levels as a percent of GDP to decline slightly to 17.7% in fiscal 2015 from the prior year's 17.9%. Both ratios are below the Budget 2014 estimates, reflecting prudent debt management.

The tabled Budget 2015 (covering fiscal 2016-2018) forecasts taxpayer-supported capital spending of just below \$11 billion through fiscal 2018 and taxpayer-supported debt to GDP declining gradually to 16.6% in fiscal 2018. Taxpayer-supported debt as a percent of taxpayer-supported revenue declines yoy but remains moderately high at 95.8% as projected for fiscal 2015. Over the three-year financial plan the burden declines gradually to 94.7% in fiscal 2018. The spending plan and ratios are down slightly from last year's tabled budget, reflecting the government's ongoing efforts to closely manage capital spending and debt issuance.

As with surpluses generated prior to the recession, British Columbia anticipates using operating surpluses to pay down debt. The province projects using a portion of the fiscal 2015 surplus to pay down approximately C\$800 million of direct operating debt. By the end of fiscal 2018, British Columbia anticipates paying down C\$4.7 billion of direct operating debt and bringing the outstanding total to \$4.8 billion, below pre-recession levels, through a mix of forecasted surpluses and balance sheet management efforts. Given the province's track record in closely managing its debt burden, Fitch views the budgeted debt ratios and reduction in operating debt as attainable.