KEY FINDINGS

UNQUALIFIED AUDIT REPORT ON TREASURER'S STATEMENTS

On 15 September 1994 an unqualified audit report was issued on the Treasurer's Financial Statements for the 1993-94 financial year.

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LIMITATIONS OF THE NET FINANCING REQUIREMENT (NFR)

Audit is concerned at the extent to which the NFR has gained acceptance as the major indicator for management of the State Debt and overall management of the Consolidated Fund. Changes in the NFR need to be considered in conjunction with other factors in order to reach an informed assessment.

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REVIEW OF THE PUBLIC ACCOUNT ACT AND OTHER REFORMS

A comprehensive review of the Public Account Act is continuing within the Department of Treasury and Finance with the objective of presenting a range of issues to the Government as part of the process of developing the 1995-96 Budget.

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In the case of some departments it may be possible to function through a single operating account within the Special Deposits & Trust Fund with supplementation of revenues by a "net appropriation" from the Consolidated Fund.

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A Working Party of Treasury, Audit and selected departmental representatives was recently established to identify issues in possible future implementation of accrual accounting by government departments.

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RECLASSIFICATION OF TRANSPORT COMMISSION INCREASES STATE DEBT

Reclassification of the Transport Commission as an inner budget agency resulted in the Commission's private borrowings of $7.74 million being assumed as part of the State Debt.

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BASS STRAIT FERRY REPLACEMENT INCREASES STATE DEBT

$75 million of total borrowings ($147 million) associated with purchase of the Spirit of Tasmania was assumed by the State. After off-setting $21 million from the sale of the Abel Tasman, the State Debt increased by a net $49 million calculated at face value.

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STATE DEBT WAS REDUCED BY SALE OF HOUSING PORTFOLIO

State Debt amounting to $100 million was retired from sale proceeds of the Tasmanian Development Authority's Housing Portfolio after meeting expenses and discharging other liabilities.

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SALE OF THE TASMANIAN GOVERNMENT INSURANCE OFFICE

State Debt amounting to $40 million was retired from the sale of TGIO.

Further receipts of $12 million expected over a five year period under a Marketing Agreement with the Purchaser, are also to be applied to retirement of State Debt.

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ACCOUNTING FOR STATE DEBT MANAGEMENT

The policy for amortising premiums and discounts on borrowings was changed in 1993-94 with a resultant surplus of $7.2 million. The previous policy of systematically amortising capital losses on debt restructuring, has in practice changed to immediate recognition.

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THE PUBLIC ACCOUNT

The Public Account is comprised of the Consolidated Fund and the Special Deposits and Trust Fund (SD&TF) established under the Public Account Act 1986.

The Consolidated Fund relates to items of expenditure which have been reserved by law through specific provisions in legislation or which have been appropriated by Parliament for the financial year. The Consolidated Fund also includes moneys received in accordance with various statutes and administrative arrangements as outlined in the State Budget.

The SD&TF relates to transactions and balances in respect of moneys deposited in separate accounts within the SD&TF in accordance with various statutes and administrative arrangements, and moneys received from the Commonwealth Government and other outside sources for expenditure on particular projects and purposes. Expenditure from the SD&TF is not subject to appropriations by the Parliament although incidental reference may sometimes be made in Budget Papers to proposed expenditure from certain accounts in the SD&TF.

Basis of Accounting

Management of the Public Account and hence the State Budget is limited by the cash basis of accounting underlying the operation of the Account.

Consistent with the provisions of the Public Account Act the majority of transactions recorded in the Public Account are tied to movements in cash resulting from actual transfers between individual items in the Consolidated Fund and/or accounts in the SD&TF.

Although some of these transfers are used, in effect, to "mimic" the establishment of accruals and provisions normally only available through the more flexible accrual based system of accounting, management of the State Budget is restricted by the limitations inherent in the cash system of accounting on which the Account is based.

Reference is made later in this Report to several amendments which have been made to the Act since 1989 to provide additional flexibility in management of the Account. Some of the amendments actually make possible the application of certain accrual accounting principles.

Treasurer's Financial Statements

The transactions and balances of the Public Account for each year are reported to Parliament through the Treasurer's Financial Statements in accordance with Section 26 of the Financial Management and Audit Act 1990 and the Financial Management and Audit Regulations 1990. Regulation 5 prescribes the minimum information to be shown in the Statements. The Statements contain detailed as well as summarised information on transactions and balances within the Public Account. Disclosures of certain other financial assets and liabilities which are related to but are not part of the Public Account, and in respect of which records are maintained by the Department of Treasury and Finance, are also included in the Statements.

On 15 September 1994 I issued an unqualified audit report on the Treasurer's Financial Statements for the 1993-94 financial year. A copy of the audit report was published with those Statements.

The Objectives of This Report

The main objectives of this Report and my previous Reports to Parliament on the Public Account are to draw attention to what in my view are the principal limitations of the information contained in the Treasurer's Financial Statements and, where appropriate, to outline the opportunities which could be taken to redress those limitations and to assist the Government in meeting the aim of improved and responsible financial management. Some comments are also included on selected abnormal transactions/balances included in the Statements.

It is not my intention to provide in this Report a systematic commentary on the operations of the Public Account for the financial year ended 30 June 1994. The Treasurer's Financial Statements for 1993-94 together with the documentation accompanying the recently presented 1994-95 Budget, provide adequate disclosure in that regard.

MEASURING PERFORMANCE IN THE PUBLIC ACCOUNT

There is no single and precise indicator available for the Public Account as depicted by the Treasurer's Financial Statements, for reliably measuring or reporting overall performance of Government in terms of financial management. This is due largely to the complex nature of government activity and the interactions between the Consolidated Fund and the SD&TF.

The difficulty in performance measurement also arises from the fact that only the transactions of the Consolidated Fund are subject to Parliamentary appropriation. Therefore the transactions in the SD&TF are usually not capable of being compared with published estimates. A further complication is that during times of significant changes in administrative arrangements involving amalgamations of departments at the same time as large scale reductions in employment levels, as have occurred since 1989, comparisons of transactions and balances in any year with prior years are largely ineffectual.

Net Financing Requirement

As mentioned in my previous reports, an important reform within the Tasmanian public sector in recent years has been the change during 1989-90 in reporting the Consolidated Fund financial results in the Net Financing Requirement (NFR) format shown in Statement 2 of the Treasurer's Financial Statements.

The NFR is the remainder disclosed in a summary of Consolidated Fund transactions after exclusion of borrowings and loan repayments from total receipts and expenditure recorded in the Fund. That remainder (or NFR) must then be financed by external borrowings and/or reliance on cash reserves available through the existence of the SD&TF i.e. internal borrowings from the SD&TF.

Through this relatively simple change in presentation the focus has turned to the level of financing (i.e. the level of borrowings) required to fund Government programs.

The end-of-year balance of the Consolidated Fund no longer has primary significance as it once did and the change in emphasis to the NFR has firmly established debt control as a key issue in public sector financial management and successive Budget strategies.

I am concerned, however, at the extent to which the NFR has gained acceptance as not only the major indicator as to management of the State Debt but also as the prime indicator for the overall management of the Consolidated Fund.

Changes in the NFR need to be considered in conjunction with other measures and activities in order to reach an informed assessment. These include changes in the SD&TF balances; trends in the debt servicing ratio and taxation severity; and comparisons with indicators relating to other States. Other considerations include the treatment adopted in respect of major asset sales and purchases; and off-budget borrowings such as the $75 million assumed in the course of replacing the Bass Strait ferry referred to later in this Report. Much of this information, although unaudited, is available from Budget documents.

It is relevant to mention that the outline of the Government's new fiscal strategy (effective from the 1995-96 financial year) as documented in the 1994-95 Budget Supporting Information, includes objectives stated in terms of some of the above performance measures.

The limitations of the NFR as an indicator of the overall management of the Consolidated Fund need to be recognised in whatever context the NFR is reported and particularly when making any assessment of the changes over time in the NFR.

It is therefore desirable that efforts be continued to pursue reforms in the management of the Public Account which ensure greater accountability by departments and government. The possibility of further reforms is best considered in the context of reforms which have occurred to date. These are summarised below.

REFORMS IN MANAGEMENT OF THE PUBLIC ACCOUNT

Reforms Since 1989

Following the introduction in 1989 of the concept of the NFR, a number of other reforms and initiatives have been put in place for the recording, budgeting and reporting procedures associated with the Public Account; they include:

Enactment of the Financial Management and Audit Act 1990

Adoption of a new format for the Treasurer's Financial Statements

Inclusion in Budget Information of Forward Estimates of Revenues and Expenditure

Providing Asset Management Accounts through which Agencies can retain certain proceeds from asset sales

Requirement for Agencies to provide Budget information on an Outputs/Outcomes basis

Enabling Agencies to save or borrow on some Items between financial years through the use of designated accounts in the SD&TF

Devolution to agencies of funds for paying rent of premises, audit fees, allowances in lieu of long service leave, workers' compensation premiums and superannuation

Review of the Public Account Act 1986

In 1992 Cabinet agreed that the Treasury undertake a comprehensive review of the Public Account Act with the aim of developing a legislative framework for accounting, budgeting and reporting which complements the Government's financial reform agenda.

Some interim amendments to the Act were completed through the passing of the Public Account Amendment Act 1993 which allowed departments to retain revenue from the sale of certain public property, allowed the carry forward into the following financial year of certain unspent funds and provided for enhanced budget management within a financial year.

Further amendments are proposed through the Public Account Amendment Bill which is currently before Parliament. The purposes of the amendments are as follows:

to provide for the retention by departments (in an account within the SD&TF) of moneys received from the provision of goods and services, as may be determined by the Treasurer;

to provide that only borrowings for purposes of an appropriation act need be credited to the Consolidated Fund;

to enable revenues additional to Budget estimates, generated within a financial year, to be applied through the Treasurer's Reserve to fund unforeseen expenditure; and

to remove an ambiguity as to the extent of the moneys received from the Commonwealth which can be applied through the Treasurer's Reserve.

The review of the Public Account Act is continuing within the Department of Treasury and Finance with the objective of presenting a range of issues to the Government as part of the process of developing the 1995-96 Budget. I understand that my Office will be consulted in the development of any future reforms.

Other Considerations in the Course of Reforms

An Australian Accounting Standard number AAS 29 "Financial Reporting by Government Departments" was issued in December 1993. Although the application of AAS 29 is from the year 1996-97, it does not automatically apply to any government department. Governments may determine whether or not their departments are required to comply with that Standard which provides for the adoption of "accrual" accounting by departments. Traditionally departments have maintained their records and reported financial performance on the "cash" basis of accounting. There are significant information and other resource implications in a change from cash to accrual based accounting.

It appears that the Standard is adaptable to existing funding structures of all states. However, it is clear that it will be more readily adapted in situations where less complex funding structures prevail.

In this context it would be opportune to assess in relation to departments:

the appropriateness of retaining, in the future, the revenues generated through provision of goods or services and designated asset sales; and

the possibility of minimising the number of accounts in the SD&TF through which they operate.

In the case of some departments it may be possible to operate through a single operating account in the SD&TF with supplementation of revenues by a "net appropriation" from the Consolidated Fund.

It is possible that the ability to retain revenues (except those in the nature of tax collections or from sales of major assets) may provide departments with appropriate incentives for greater overall financial management.

In my opinion the current review of the Public Account Act should cater for the adoption by all departments of AAS 29 as from 1996-97 and make provision for funding structures which will facilitate the implementation and compliance with that Standard.

It is appropriate to report here that a Working Party comprised of Treasury, Audit and selected departmental representatives was recently established to identify issues associated with the implementation of the Standard by departments. The departmental representation derives from an interest in trialing AAS 29 in those departments in the lead up to the 1996-97 implementation year.

Another matter which should be addressed as part of the review of the Act by Treasury and the deliberations of the Working Party is the future role of Outputs/Outcomes information in terms of administration of the Act, financial reporting by departments, and any implications for determination of departments' eventual general ledger structures.

This is an issue of considerable importance as I understand that Treasury intends to collect and publish on the basis of outputs for 1995-96 Budget information and the 1996-97 Forward Estimates.

Whole-of-Government Reporting

In accordance with the agreement reached at the 1991 Premiers' Conference, the Budget information provided annually now includes unaudited information on Government Financial Estimates (GFEs) and Financial Assets and Liabilities (FALs) in a uniform format for whole-of-government.

The GFE classification is a nationally consistent format for comprehensively presenting the financial transactions of government and its trading enterprises. GFEs facilitate comparisons of financial performance from year to year and between states. I understand that they are increasingly used by financial markets, credit rating agencies and other analysts. But the information contained in GFEs and FALs is largely based on cash receipts and outlays and excludes non-financial assets and liabilities. Furthermore the information is not directly comparable with information provided elsewhere in the Budget or in the Treasurer's Financial Statements. This is because those documents have a Consolidated Fund focus and are classified according to Ministerial portfolios while GFEs and FALs have a whole-of-government focus and use statistical classifications.

Consequently it can be argued that, from the accountability point of view, GFEs and FALs are not an adequate substitute for consolidated statements prepared through a process of aggregating agencies' and statutory authorities' financial statements by the application of accrual accounting principles.

Although there is now an Australian Accounting Standard (AAS 29) for the preparation of accrual based financial statements by government departments, no standard has yet been developed for whole-of-government reporting. I understand that the project of generating a standard is a high priority with the Australian Accounting Research Foundation and that an exposure draft is planned to be published in 1995.

Notwithstanding the lack of a standard, the Governments of New South Wales, Victoria and New Zealand already produce consolidated statements showing their whole-of-government operating results and financial position.

ABNORMAL 1993-94 TRANSACTIONS AFFECTING THE PUBLIC ACCOUNT

Assumption of Transport Commission Liabilities

As from 1 July 1993, the Transport Commission was reclassified as an inner budget agency and its liabilities were assumed by the State. These included the Commission's private borrowings of $7.74 million from Tascorp which had not then been repaid. These borrowings have been included as a component of State Debt.

This assumption of debt is not reflected as a transaction in the Public Account and hence does not change the balance of the Account. However, its ongoing effect is an increase in reported debt servicing costs of the State on borrowings through Tascorp.

Replacement of the Bass Strait Ferry

During 1993-94 the vessel, the "Abel Tasman", which was formerly used on the Bass Strait ferry run between the ports of Melbourne and Devonport, was replaced with a larger and more modern vessel the "Spirit of Tasmania".

The ferry service had previously been operated by the TT-Line, a Branch of the Transport Commission.

As from 1 November 1993, TT-Line Company Pty Ltd (the Company), a wholly State-owned corporation, assumed responsibility for the service with the Spirit of Tasmania.

The Abel Tasman was subsequently sold by the Government. The sale price and other associated income totalled $24.9 million. Out of that amount, $21 million was off-set against that proportion ($75 million) of borrowings which was assumed during 1993-94 by the Government from the Transport Commission's total borrowings of $147.2 million associated with the acquisition of the replacement vessel. The residual borrowing of $72.2 million (total borrowings $147.2 million less $75 million assumed by the State) are now the responsibility of the Company.

The net affect on the State Debt of the $75 million being assumed by the State, less the $21 million off-set from the sale of the Abel Tasman, was an increase of $49.1 million (calculated at face value).

The debt servicing costs associated with that debt during 1993-94 amounted to $2.2 million and are estimated at $6.2 million for 1994-95. These costs are met out of a separate Item (C227) in the Finance-General Division rather than out of Item C733 through which other debt servicing costs associated with borrowings from Tascorp, are funded.

As part of the new arrangements the Government also transferred all assets and liabilities of the former TT-Line (while a Branch of the Transport Commission) to the Company. In return, the State received 94.568 million fully paid ordinary shares with a par value of $1. One half of those shares are in the name of the Treasurer while the other half are held in the name of the Minister for TT-Line.

The exchange was based on a valuation of $94.568 million for assets and liabilities transferred which included the Spirit of Tasmania at cost of $167.9 million.

Sale of the Tasmanian Development Authority's Public Housing Portfolio

The Tasmanian Development Authority's (TDA's) public housing portfolio was sold in 1993-94 under the provisions of the Homes (Sale of Mortgages) Act 1993.

Home lending for low income earners is now arranged through the new Home Ownership Assistance Program (HOAP). It is estimated that the Director of Housing will undertake borrowings of $25 million through Tascorp in 1994-95 to meet the funding requirement of HOAP.

In 1992-93 current and past years' capital losses on restructuring totalling $5.4 million were charged against debt servicing costs in full, because of availability of funds from that source, rather than being amortised.

In 1993-94 current year's losses were written off against the surplus provision for amortisation of net discounts which was available in the State Debt Management Account.

In 1994-95 or subsequent years the remaining surplus provision for amortisation of net discounts amounting to $3.8 million (referred to above) is to be applied to any future capital losses on restructuring of debt.

Need for Documentation of Policy

The Australian Accounting Standards provide appropriate guidance on how to account for differences between draw-down and face values of securities as follows:

premiums/discounts on new borrowings should be amortised over the term of the applicable loan; and

capital losses on debt restructuring should be recognised in the year of occurrences.

In some cases the procedures as applied by the State coincide with the requirements of the Standards notwithstanding that Accounting Standards do not automatically apply to governments.

The question is that procedures have not been applied consistently from year to year.

I recently wrote to the Secretary of the Department of Treasury and Finance pointing out that, under these circumstances, there is a need to clearly identify in the notes to the Statements just what those policies are and, where there have been departures from or changes to policy, to identify these and fully explain the reasons therefore.