How big bucks from big tobacco prevented N.L.'s deficit from doubling
Province is booking decades of future revenue from lawsuit settlement this year
The Newfoundland and Labrador government included in this year's pre-election budget decades worth of revenues from the pending settlement of a lawsuit against tobacco companies, helping stem a flow of red ink that could have doubled the current projected deficit.
At this point, it is the only province that has decided to apply all of the cash — in Newfoundland and Labrador's case, more than half a billion dollars — to the financial ledger now.
And that has experts raising eyebrows.
"Given that it's exactly the same transaction, I don't know why there would be different recognition criteria and practices and that the provinces would account for this differently," Azfar Ali Khan, director of performance at the University of Ottawa's Institute of Fiscal Studies and Democracy, said in a recent interview with CBC/Radio-Canada.
"That would strike me as a bit puzzling."
His colleague — former Parliamentary budget officer Kevin Page, who is now CEO of the non-profit think tank — said that, in the final analysis, it will be Newfoundland and Labrador's auditor general who will opine on the implementation of accounting rules.
Former federal comptroller general Charles-Antoine St-Jean said Page's assessment is in line with his.
"If the minister of finance can satisfy herself — and make the case to the AG — that the payment stream is secured, there is a legitimate basis to record the full amount at this time," St-Jean wrote in an email to CBC/Radio-Canada.
"The real issue is the first word, i.e. 'if.'"
But the AG does not appear to have been brought into the loop.
Auditor General Denise Hanrahan confirmed to CBC/Radio-Canada that her office had not been consulted in advance of the decision.
The Department of Finance did not make anyone available for an interview, but in a statement said "it is not surprising to see other jurisdictions differ as to how to account for the legal settlement" as the process has been evolving over a number of years, and continues to evolve.
The government says it got an update from its external legal team on when proceedings are anticipated to wrap up.
"Based on this status update, it appeared reasonable to assume that an agreement on the payment terms of the legal settlement would be reached during the 2025-26 fiscal year," spokesperson Janelle Simms wrote in an emailed statement sent on behalf of the department.
"At which point, the basis for recognizing all revenue from the legal settlement will have been met in accordance with public sector accounting standards."
According to the department, the final accounting of the legal settlement will ultimately be determined during the public accounts process, which is subject to an audit by the auditor general.
The public accounts for this fiscal year won't be published until the fall of 2026.
Most provinces have settlement windfall under review
In contrast to Newfoundland and Labrador, most other provinces are still pondering how to account for the tobacco lawsuit windfall.
British Columbia, Alberta, Saskatchewan, New Brunswick, Nova Scotia and Prince Edward Island all indicated the matter is still under review.
P.E.I. has only included this year's expected payment in this year's revenue estimates.
Nova Scotia stressed that it would like to speak with that province's auditor general on the best approach.
Manitoba, meanwhile, didn't book any tobacco lawsuit settlement cash in its 2025-26 fiscal plan at all.
"As the exact timing and quantum of payments are not certain enough, this settlement has not been included in the budget," the province's budget documents note.
Quebec applied a big, $1.7-billion upfront payment to last year's financial framework, with smaller year-by-year amounts ranging from $97 million to $253 million coming between now and 2030. Its overall settlement is expected to total $6.7 billion.
Ontario — which tables its budget later this week — did not respond to CBC/Radio-Canada inquiries.
Université de Moncton professor Pierre-Marcel Desjardins questions why Newfoundland and Labrador stands alone in its handling of the settlement cash right now.
"Why is it that Newfoundland and Labrador seems to be the only province accounting for all anticipated revenues this year, while the others seem to want to be more cautious?" Desjardins said.
"Without being too cynical, there may be an election deadline at play."
Voters in Newfoundland and Labrador will go to the polls within months. A provincial election must be held by October.
In March, Ontario Superior Court Chief Justice Geoffrey Morawetz approved a $32.5-billion compensation plan to be paid by three tobacco companies.
A portion of the cash will go to some smokers who were diagnosed with cancer.
Provincial and territorial governments will split about three-quarters of the overall amount — just over $24.7 billion.
Nearly 40 per cent of the compensation will be paid up front. The remainder will flow over the next couple of decades, with the companies forking over the majority of their net after-tax income until the $32.5 billion is paid in full.
Resolution has been a long time coming. The litigation dates back to the 1990s.
Newfoundland and Labrador is projecting a $372-million deficit in the 2025-26 fiscal year.
Finance Minister Siobhan Coady has downplayed any concerns about that deficit, stressing that it only represents about three per cent of the province's revenues.
At a legislative committee meeting last month, deputy minister Michelle Jewer said the province is in line to receive $520 million over 30 years from the tobacco settlement, with the full amount accruing in this year's budget.
Jewer said legal fees of around $125 million will also hit the books this year.
That results in a net benefit of almost $400 million.
The province's projected deficit could have roughly doubled without the windfall tobacco cash.
The impact of the lawsuit settlement on this year's financial picture was not mentioned in Coady's 82-minute budget speech on April 9.
Government officials revealed the revenue boost in a budget day technical briefing, when a CBC News reporter asked about a massive increase in projected fees and fines.
The province has booked decades of payments in advance before.
In 2019, money from Ottawa for a new Atlantic Accord arrangement — a deal that runs until 2056 — hit the financial statements in the initial year the deal was signed.
At the time, government officials said that was the appropriate accounting treatment, because annual payments were guaranteed at set amounts going forward.
Ian Lee, associate professor at Carleton University's Sprott School of Business, said there is risk associated with the future viability of the tobacco industry.
"If there's any industry that's a very high-risk industry of not being around in 20 years, it would be, I think it's fair to say, this would be near the top of the list, if not at the top of the list," Lee said.
"So whether or not they'll be around to pay this money is very, very uncertain."
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