KEY FINDINGS?1

THE PUBLIC ACCOUNT?3

Basis of Accounting?3

Treasurer's Financial Statements?3

Objectives of This Report?4

MEASURING PERFORMANCE IN THE PUBLIC ACCOUNT?5

Net Financing Requirement?5

REFORMS IN MANAGEMENT OF THE PUBLIC ACCOUNT?7

Review of the Public Account Act 1986?7

Reporting by Government Departments?7

Whole-of-Government Reporting?8

ADDITIONAL HOUSING CONTRIBUTIONS FOLLOWING THE SALE OF TDA HOUSING LOANS?9

FUNDING OF ACCUMULATED COSTS OF THE FORMER DEPARTMENT OF CONSTRUCTION AND SUBSEQUENT "WORKS" AGENCIES?11

MANAGEMENT OF THE STATE DEBT?13

Borrowings from Tascorp?13

Borrowings from the Commonwealth?13

RETIREMENT BENEFITS FUND SCHEME - FUNDING OF LIABILITY?15

Funding from Reserved by Law Item?15

Creation of Superannuation Provision Account?15

Determination of Unfunded Liability?16

TASMANIAN STATE SERVICE WORKERS' COMPENSATION SCHEME?19

HEADS OF AGENCIES ARE RESPONSIBLE FOR MANAGEMENT OF EXPENDITURE OF FUNDS?21

Breach of Treasurer's Instructions by Payment for Goods Before Supply?22

Irregular Payments Under the Supported Accommodation Assistance Program?23

RESPONSIBILITY FOR MONITORING AND RECORDING COMMONWEALTH

SPECIFIC PURPOSE GRANTS?25

Hospital Funding Grant?25

Building Better Cities Grant?26

Technical and Further Education Grants?26

REDUCED VALUE OF CERTAIN STATE FINANCIAL ASSETS?27

Financial Assistance to the Mount Lyell Mining and Railway Company Ltd?27

Deposits with the Trust Bank?27

On 21 September 1995 an unqualified audit report was issued on the Treasurer's Financial Statements for the 1994-95 financial year.

(Page 4)

The limitations of the NFR as an indicator of the overall management of the Consolidated Fund need to be recognised.

(Page 5)

The Government has decided that all agencies will adopt accrual reporting with effect from 1996-97.

Following the sale in 1993-94 by the State of the TDA's housing loans, the State has agreed to make additional contributions totalling $67 million in real terms to Tasmania's Housing Program over several years.

The Government strategy for transferring the main activities of the former Department of Construction to two proposed State corporations involved redundancy costs of some $13 million over 2 years and resulted in the need for funding over several years of other accumulated costs totalling around $14 million.

(Page 11)

The strategy of the Committee having responsibility for managing the State's borrowings exposure to the financial markets now includes the use of interest rate derivatives.

All Commonwealth securities issued on behalf of Tasmania will mature by 2005-06 and State Authorities to which some of these borrowings have been on-lent are now required to repay their portions of on-lent borrowings by that date in accordance with established repayment schedules.

Despite substantially increased effort to provide greater funding of the State's liability for the Retirement Benefits Fund Scheme, the balances in the superannuation provision accounts maintained by Treasury increased by only $3.2 million during 1994-95 due to a trend towards former employees opting to use the more liberal lump sum provisions allowed by the new rules in preference to pensions.

Growth in the estimated unfunded claims liability of the Tasmanian State Service Workers' Compensation Scheme continued at an alarming rate in 1994-95. The liability has increased by 160% over 3 years to $49 million at 30 June 1995. Financial incentives for improved claims management by Agencies and the Fund Manager have failed.

(Page 17)

(Page 20)

The Department of Community and Health Services made payments under the Supported Accommodation Assistance Program to community organisations for employees' award variations without the Treasurer's authorisation of additional funds. The payments were only made possible through the irregular use of two accounts in the Special Deposits and Trust Fund of the Public Account.

(Page 21)

Actual receipts under the Hospital Funding Commonwealth Grant were $10.4 million less than estimated for 1994-95. Although the downwards adjustments made by the Commonwealth were partly due to factors outside Tasmania's control, there were also concerns about the accuracy of 1993-94 hospital activity data supplied (on a provisional basis only) to the Commonwealth in February 1995 by the Department of Community and Health Services.

(Page 23)

$2.2 million received prior to 30 June 1995 and which was to be applied to Technical and Further Education programs in the following year was transferred by the Department of Industrial Relations, Vocational Education and Training to an account in the Special Deposits and Trust Fund using a procedure which resulted in receipts from this source during 1994-95 being understated by that amount.

(Page 24)

In accordance with the Memorandum of Understanding entered into with the Treasurer in June 1995, a proportion amounting to $4.3 million of the financial assistance provided to the Mount Lyell Mining and Railway Company Ltd during the last 10 years will not be repaid by the Company following closure of its operations at Mt Lyell in December 1994.

(Page 25)

Under a Deed of Variation to the arrangements for the purchase by the Trust Bank of the State owned former Tasmania Bank, the State will receive $12.645 million of its $25 million special deposit which was to be called on for doubtful loans of the Tasmania Bank.

(Page 25)

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 reference may 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 many transactions recorded in the Public Account result from non-cash or "book" transfers of amounts 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, more effective management of the State Budget is restricted by the limitations inherent in the cash system of accounting on which the Account is based.

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 21 September 1995 I issued an unqualified audit report on the Treasurer's Financial Statements for the 1994-95 financial year. A copy of the audit report was published with those Statements.

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 or 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 1995. The Treasurer's Financial Statements for 1994-95 together with the documentation accompanying the recently presented 1995-96 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. 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 very subjective.

To some extent these limitations are compensated for by the information provided in recent years in the annual Budget papers such as the Government Financial Estimates and Financial Assets and Liabilities. These are referred to later in this report in the context of whole-of-government reporting.

Net Financing Requirement

The Net Financing Requirement (NFR) shown in Statement 2 of the Treasurer's Financial Statements, 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.

The emphasis on the NFR has firmly established debt control as a key issue in public sector financial management and successive Budget strategies.

There is a concern, however, that the NFR may be seen not only as the sole indicator as to management of the State Debt but also as the prime indicator for the overall management of the Consolidated Fund.

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.

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 agencies 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 were achieved through the Public Account Amendment Act 1994. The main features of that Act include allowing agencies to retain such revenues from the provision of goods and services as may be determined by the Treasurer, and supplementation of the Treasurer's Reserve with revenues in excess of Budget estimates.

Reporting by Government Departments

Australian Accounting Standard 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 agencies are required to comply with that Standard which provides for the adoption of "accrual" accounting by departments.

Traditionally agencies 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.

On 14 August 1995 the Government decided that all agencies will adopt AAS 29 with effect from 1996-97.

It is appropriate to report here that a Working Party comprised of Treasury, Audit and representatives of the Department of Education and the Arts and the Department of Community and Health Services was established in August 1994 to identify issues associated with the implementation of AAS 29 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.

Whole-of-Government Reporting

The commitment to introduce accrual accounting for agencies is a significant development and a logical extension of that commitment is the reporting of financial performance and financial position for the whole-of government.

As a consequence of 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. However 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.

There is currently no accounting standard for whole-of-government reporting although in March 1995 the Australian Accounting Research Foundation issued an exposure draft ED 62 "Financial Reporting by Governments".

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

A former barrier to producing whole-of-government statements for Tasmania will have been removed by 1996-97 now that a firm commitment exists for the introduction of accrual reporting as from that year. All major statutory authorities already report on an accrual basis. 

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

Proceeds from the sale of the portfolio were $98.1 million and after deducting $0.7 million for sale expenses, the balance of $97.4 million was transferred to the TDA in connection with the winding-up of its home lending activities.

After repaying the debt associated with the portfolio and making a "seeding" payment of $6 million to enable the new Home Ownership Assistance Program managed by the Department of Community and Health Services (DCHS) to commence operations, the residual TDA funds of $100 million were transferred to the State and applied to retirement of State Debt.

This treatment resulted in a difference of views between the State and the Commonwealth on the application of these funds and an arrangement was entered into in June 1995 to resolve the matter.

The arrangement provides that, after deduction from the $100 million (the amount applied to retirement of State Debt) of a $33 million component representing the State's equity in the sold housing portfolio, the balance of $67 million be applied as additional future housing funding contributions into Tasmania's Housing Program. The $67 million is the amount which the Commonwealth believes should have been applied to reduction of Commonwealth Rental Housing debt.

The arrangement further provides that after payment of $8 million during 1994-95 and 1995-96, the remaining $59 million be paid in real terms by annual installments of not less than $6 million commencing in 1996-97.

The $8 million was fully paid in June 1995 from a new Item, C238 "Housing Services: Special Payment" into the SD&TF Account T592 Housing Services Operating Account administered by the DCHS, in satisfaction of the requirement to pay that amount over two years.

The burden of these arrangements on the Consolidated Fund in 1994-95 and future years' Budgets after 1995-96, will to some extent off-set the expected benefits to the State from the sale of the portfolio.

No specific provision has been made, or was required, in the 1995-96 Budget for payments under these arrangements.

In recent years there was a Government strategy for the transfer of the main activities of the former Department of Construction (DOC) to two separate corporations:

• Architectural and Consulting Services Corporation (known in 1994-95 as the Professional Services Group)

• Civil Construction Services Corporation (known in 1994-95 as Works Tasmania)

The costs of redundancies borne by the State in connection with this evolution during 1993-94 and 1994-95, excluding normal entitlements to leave and superannuation, amounted to some $13 million.

Substantial other costs had accumulated over recent years from the operations of the DOC and the agencies which were subsequently established in the transition of DOC functions through commercialisation to corporatisation. The accumulation of those costs was made possible through overdrawn balances in three accounts within the SD&TF which are currently administered by the Department of Transport; the accounts concerned are:

T650?Works Tasmania Civil Construction Group Operating Account

T674?Works Tasmania Professional Services Group Operating             Account

T759?Works Division Commercialisation Account

The Consolidated Fund Appropriation 1994-95 Act under Division 22, Finance-General, included the Item "C231 Works Tasmania: Contribution towards Operating Deficit ..... $600,000". The purpose of the Item was to contribute towards the operating deficit of the now effectively disbanded Professional Services Group as reflected in Account T674 Works Tasmania Professional Services Group Operating Account. In addition to the appropriation of $0.6 million, further expenditure of $2.8 million was authorised on 30 June 1995 to reduce the overdrawn balances in the three above Accounts.

The transfer of the $3.4 million from this Item (C231) in 1994-95, together with a New Item established during 1993-94 under Transport and Works "Costs Associated with the Establishment of State Authorities - $3,600,000", brought to $7 million the funding applied to the accumulated costs as at 30 June 1995.

Notwithstanding this level of funding of accumulated costs, the unfunded overdrawn balances in these three Accounts at 30 June 1995 amounted to $6.9 million.

Some $6 million of that amount is notionally attributable to funding the net current assets assumed by the Civil Construction Services Corporation on commencement in April 1995, as the majority of current assets and liabilities taken over by the Corporation had been funded out of the SD&TF.

The costs referred to above are summarised as follows as at 30 June 1995:

?????????        $million

      Redundancies????????  13.1

      Funded operating deficits and commercialisation outlays??    7.0

      Unfunded operating deficits and commercialisation outlays ?    6.9

???????             Total  ?$27.0

Under the corporatisation arrangements with the Civil Construction Services Corporation it was agreed that the State will finance the payout of pre-corporatisation entitlements to normal leave accrued to employees who have transferred to the Civil Construction Services Corporation.

Some off-setting savings to the accumulated costs may be available from the possible sale by the State of assets surplus to the Corporation's requirements.

It is understood that the Government has a strategy for funding the remaining accumulated costs of $6.9 million over the next 3 years. The 1995-96 Budget provides for a $2 million contribution to the overdrawn Accounts as part of that strategy.

Certain changes have occurred during 1994-95 in the management of the State Debt as a consequence of the continuing shift in the debt profile. Until 1985 all borrowings by the State were from Commonwealth sources under the 1927 Loan Agreement. Since that time all new borrowings have been arranged through the Tasmanian Public Finance Corporation (Tascorp). The transition has meant that where in 1985 100% of the State Debt was from Commonwealth sources, in 1995 only 33% of total State Debt is from the Commonwealth. the remainder is sourced from Tascorp 65% and the State Development Account 2%.

Borrowings from Tascorp

The State now has responsibility for managing new borrowings and refinancing the two thirds ($1.2 billion) of debt which is arranged through Tascorp and is exposed to fluctuations in the financial markets. This responsibility is delegated to the Liability Risk Management Committee formed in 1991 and comprised of senior officers of the Department of Treasury and Finance and Tascorp. The Committee's mission is to ensure that, within the context of the Government's policies on present and future levels of State Debt, the ongoing cost of servicing debt is minimised at an acceptable level of financial risk. Tascorp is the "portfolio manager" in the arrangement. The policies and procedures for the risk management of State Debt have been documented by the Committee and I understand that a manual is being developed to document the accounting treatment applicable to the financial transactions involved.

Details of State Debt are disclosed in Statements Nos. 8 and 9 of the Treasurer's statements. The notes to Statement No 9 show the amounts of several "zero coupon" loans, one "indexed annuity loan and one "capital indexed" loan, which together with premiums and discounts on other securities, are managed through the State Debt Management Account (T839) in the SD&TF. That account also records $3 million paid to Tascorp in January 1995 for the establishment of an account with the Deutsche Bank to enable Tascorp to deal in futures on behalf of the State. A withdrawal reduced the amount of that deposit to $1.7 million by 30 June 1995. It is understood that use of interest rate derivatives has not been a feature of State Debt management prior to 1994-95. As at 30 June 1995, there were 175 outstanding derivatives consisting of 10 year bond futures contracts.

Borrowings from the Commonwealth

In November 1994 the Financial Agreement Act 1994 approved an Agreement between the Commonwealth and the States and Territories for purposes of managing the repayment of the remaining Commonwealth borrowings on their behalf.

The new Agreement rescinds much of the 1927 Loan Agreement and provides for the cessation of the former National Debt Sinking Fund and the establishment of a Debt Retirement Reserve Trust Account to be administered by the Commonwealth.

The State is continuing to make standard contributions to the new Trust Account on the same basis as previous contributions to the former Sinking Fund. In addition the State pays into the Trust Account supplementary contributions for loan redemptions by the Commonwealth on Tasmania's behalf.

All Commonwealth securities on issue on behalf of Tasmania will mature by the financial year 2005-06. Arrangements were made during 1994-95 for all Tasmanian statutory authorities to which Commonwealth borrowings had been previously on-lent, to repay all those borrowings in accordance with repayment schedules by the year 2005-06. Prior to 1994-95 those statutory authorities only made repayments equivalent to their share of the Sinking Fund contributions paid by the State on their borrowings from Commonwealth sources. Authorities owing less than $1 million had the option of repaying in full at face value and some took up this option.

The Retirement Benefits Fund (RBF) Scheme has traditionally been an unfunded Scheme from the perspective of on-budget agencies. When the Scheme was substantially amended from 1 July 1994, agencies started to pay employer contributions into the Superannuation Provision Account (T780) of the SD&TF. Employer contributions by agencies in 1994-95 expressed as a percentage of employees' salary were 11%, 7.5% and 5% for Contributory, Police Provident Fund and Non-Contributory members respectively and relate to the currently accruing liability. In previous years agencies were not required to contribute to provisions in relation to the RBF Scheme. They only contributed in respect of the former Superannuation Accumulation Fund at 3% of salary for all employees and a further 2% in satisfaction of Superannuation Guarantee Charge requirements for employees who were not contributing members of the RBF Scheme.

Funding from Reserved by Law Item

The employer share of emerging costs of pensions and lump sums paid by the RBF Board were paid from the Superannuation Provision Account in 1994-95 and not from the "reserved by law" Item R025 which was previously used to pay these costs. A new Item R069 was established to make annual contributions into the new Superannuation Provision Account in respect of accrued past service liability as part of the Government's strategy for eliminating the unfunded liability of the Scheme within 20 years. The 1994-95 contribution from Item R069 to Account T780 was $24.2 million and the annual contributions are planned to increase over the next five years to $47.8 million in 1999-00.

Audit understands that the planned contributions are not necessarily formulated to eliminate the unfunded liability over the next 20 years. It is also understood that these annual contributions arise from a policy decision and are not required legislatively notwithstanding that they have been designated as "reserved by law".

Creation of Superannuation Provision Account

Two other superannuation related provision accounts the Superannuation Accumulation Fund Account (T774) and the Superannuation Guarantee Charge Provision Account (T784) were closed during 1994-95 and balances transferred to the new Superannuation Provision Account (T780).

The balance in the Superannuation Provision Account (T780) at 30 June 1995, even after receiving the $24.2 million contribution from R069 and $110.7 million from the closed Accounts T774 and T784, was $107.6 million. That amount is only $3.2 million more than the combined balances at 30 June 1994 of the balances of the Accounts which were closed and their balances transferred to Account T780.

This relatively small increase in the overall provision was the result of increased emerging costs which were apparently due to two factors.

Firstly the change in rules of the Scheme allow better lump sum options than before. Retiring members can now take 100% lump sums where a 50% lump sum option previously applied. That change has retrospective effect to 1 July 1993 and some members who retired in 1993-94 had their benefits recalculated to take advantage of the more liberal lump sum options now available.

Secondly the treatment of superannuation costings for redundant employees changed for 1994-95. Previously all reimbursements to the RBF Board for employer share of payments associated with redundant employees were costed to redundancy accounts in the SD&TF. This treatment ceased in 1994-95 and these costs are now being met in full from the Superannuation Provision Account T780.

Factual data was not available to show the financial effects of these two factors.

Determination of Unfunded Liability

The unfunded liability of the Scheme on the basis of the new arrangements has not yet been actuarily determined. The triennial evaluation of the Scheme is now being undertaken and the report is expected to be available by the end of 1995.

Meantime the unfunded liability has been disclosed in the 1994-95 Treasurer's Statements as $942 million based on a Treasury adjustment to the Actuary's 1992 assessment of the RBF Scheme under the rules prevailing at that time. The 1992 assessment was used as a proxy in the absence of an up to date assessment.

The Treasury adjustment involved the inclusion of 1994 balances of liability in respect of Superannuation Accumulation Fund and Superannuation Guarantee Charge, and the estimate of liability under Public Servants' Retiring and Death Allowances Act 1925. It also made allowance for the liability emerging for 1994-95 and took account of the balance in the Superannuation Provision Account as at 30 June 1995 from which the 1994-95 emerging employer cost under the Scheme had been financed. No recognition was given in the Treasury adjustment for either the liability emerging or the emerging costs under the former RBF Scheme rules during 1992-93 and 1993-94.

Therefore the $942 million attributed to the unfunded liability under the revised RBF Scheme arrangements can only be regarded as a provisional estimate pending completion of the triennial evaluation.

In the Treasurer and Minister for Finance section of my Report No. 2 of 1994, I made reference to the increasing unfunded liability for outstanding claims of the Tasmanian State Service Workers' Compensation Scheme and the lack of comprehensive reporting of its transactions and liabilities.

Action is being taken to report the 1994-95 transactions and balances on an accrual basis and in compliance with Accounting Standard AAS 26 "Financial Reporting of General Insurance Activities". The preparation of the financial statements has been outsourced to the private sector and statements are expected to be available for audit by this Office in October 1995.

The growth in estimated unfunded claims liability has continued at an alarming rate. Figures are not available to clearly show the increase since the Scheme started operations in 1989-90. However the estimated unfunded liability has increased in just three years from $18.9 million at 30 June 1992 to $49.2 million at 30 June 1995; an increase of 160%.

During this three year period revised arrangements, which provided financial incentives for improved claims management, applied to the larger Agencies and the Fund Manager. These arrangements failed to achieve the desired result and the majority of Agencies concerned and the Fund Manager have been required to make penalty contributions rather than receiving distributions.

Those incentives have been removed from the latest management Agreement entered into with the Fund Manager which covers the three years from 1995-96 to 1997-98 inclusive.

The Scheme operates through the Tasmanian State Service Workers' Compensation Account (T837) in the SD&TF. That Account receives all premiums and pays claims as well as operating expenses of the Scheme. During 1994-95 the credit balance of $3.5 million in the Account at the beginning of the year reduced by $8.2 million and the Account closed with an overdrawn balance of $4.7 million. This change is reflected in the unfunded liability figures referred to above.

The Scheme commenced operations on 1 July 1989 and the need for it to meet the costs of pre 1 July 1989 claims relating to the former Government Employees Workers' Compensation Scheme, has had a negative impact on its financial position. This deficiency was redressed with contributions of $3.2 million from the Consolidated Fund in 1992-93 and $6 million in 1993-94. A contribution of a further $6 million was included in the 1994-95 Budget under Finance-General Item C875. However, an actuarial assessment revealed that no further contribution was required in respect of pre-1989 claims and the Item lapsed.

Further details on the operation of the Scheme and the outcome of the audit will be provided to Parliament in the No. 2 Report which is intended to be tabled in November 1995.

The central role of Treasury involves the management of the State Budget and encompasses the provision of a broad financial management framework and includes the development of accounting guidelines, standards, statutes and instructions in order to facilitate general consistency of application throughout agencies.

It is the responsibility of Heads of Agencies to ensure that appropriate processes and procedures are established, having regard to the policy framework and standards/guidelines to effectively manage the funds and assets under their control.

From time to time it is found, however, that the culture prevailing in some parts of agencies does not reflect a proper understanding of these responsibilities; for example:

• delegations for certain commitments or actions may not be in place; and

• emphasis may be on bulk processing without regard to specific requirements of less usual transactions.

There are also cases where non-compliance with requirements may be motivated by acting in the perceived best interests of the agency.

During 1995-96, Audit will undertake a performance review across all inner-budget Agencies of three related issues as follows:

• extent of compliance with the requirements to have an accounting manual;

• whether the form and content of accounting manuals meet the prescribed requirements; and

• degree of compliance with selected requirements set out in the Treasurer's Instructions and the accounting manual.

Auditors frequently identify breaches of controls which may include non-compliance with Treasurer's Instructions. These are routinely referred to agencies' management for information and comment. The responses by management may involve:

• undertakings to remedy the shortcomings identified;

• justification of the breaches on risk management grounds; or

• trivialisation of the audit findings.

However, during 1994-95 a number of breaches of requirements resulted in some exposure to financial risk and had implications for the reliability of information reported in the Treasurer's Financial Statements.

Details of these are as provided below.

Breach of Treasurer's Instructions by Payment for Goods Before Supply

In April 1995 the Company which supplied Osborne Computers in Australia did not obtain Commonwealth endorsement because it failed that Government's financial stability standards.

In June 1995 the Company was placed in receivership. It had been a major supplier of computer equipment to the public sector for a number of years.

The Company continued as a supplier to the State until that time. The C150 Contract Price List of the Company's products which was arranged by the State Purchasing and Sales Division of the Department of Treasury and Finance, included discounted "cash with order prices" for the majority of listed products, notwithstanding that Treasurer's Instruction 521 precludes such prepayment by Agencies.

A number of Agencies which had placed orders on that basis in breach of the Instruction were faced with the possibility of loss of the amounts prepaid when the Company was placed in receivership and was unable to deliver the products.

The Secretary of the Department of Treasury and Finance arranged an investigation by his Department of the circumstances surrounding the prepayments.

The investigation found that 3 Agencies and 2 Statutory Authorities were exposed to loss through prepaying for Osborne products to the extent of $196,000 and $60,000 respectively. The State Purchasing and Sales Division also stood to lose some $22,000 in outstanding commission.

The extent of final losses is not capable of being determined at this stage as the Company has been acquired by overseas computer interests and negotiations are continuing for the delivery of outstanding products.

A further financial implication of the Company's failure is the loss of maintenance support relating to past purchases, but that issue is unrelated to the question of prepayments.

In the case of Statutory Authorities there is no instruction prohibiting prepayments for goods and the prudence of the practice is a question of risk management. However, Agencies are bound by Instructions and should not expose the State to the risks associated with breaches.

The Osborne experience provides a salutary lesson that prepayments for goods and services involve real financial risk which Agencies are not permitted to take.

Irregular Payments Under the Supported Accommodation Assistance Program

In accordance with Commonwealth/State arrangements the State provides matching funding for payments under the Supported Accommodation Assistance Program which are appropriated through the Department of Community and Health Services (DCHS), Program 4, Item C130. The appropriation under that Item for 1994-95 was $6.529 million.

In the expectation that additional funds would be approved, DCHS made payments to community organisations in excess of the appropriation. These payments related to increased costs incurred by the organisations due to award variations applying to their employees.

In late June 1995 the Minister for Community and Health Services submitted a request to the Treasurer for additional funds of $0.375 million to be spent from Item C130.

No approval was received as at 30 June 1995 by which time DCHS had already made the payments concerned using accounts in the SD&TF in a manner which was inconsistent with the purposes of the accounts as established by the Treasurer under the Public Account Act.

The payments were made from Account T626 "Supported Accommodation Assistance Program Account". The intended use of this Account is to provide a mechanism for carrying-over funds appropriated but unspent in any financial year. There is no authority for the Account to be overdrawn as any payments would be deemed to be funded by amounts carried-over. In this case there was not a sufficient balance in Account T626 to fund the payments and it was overdrawn without authority.

The overdrawn balance was made good by transfer of $0.375 million from another Account (T637) "Department of Community and Health Services Special Projects Operating Account". Although the transfer was inconsistent with the purpose of Account T637 it was processed by Treasury in July 1995 prior to finalising the transactions in the SD&TF for the 1994-95 financial year.

Commonwealth grants are a major source of receipts into the Consolidated Fund. In 1994-95 they represented 54% of all receipts. The recurrent General Purpose Grant alone represented 35% of all receipts while the remaining Specific Purpose Grants for the year comprised 19% of all receipts.

Negotiations for and the management of the General Purpose Grant are achieved centrally while many of the Specific Purpose Grants rely on separate agencies for monitoring and accountability for any conditions which may be attached to the funds concerned.

In 1994-95 three cases were noted where an apparent lack of timely and appropriate action resulted in reduced receipts from Specific Purpose Grants being reported in the Consolidated Fund. Details of these cases are provided below.

Hospital Funding Grant

Actual receipts during 1994-95 under the Hospital Funding Grant (Y020) were $10.4 million less than estimated in the 1994-95 Budget. This shortfall is attributable to the application by the Commonwealth of adjustments to the Bonus Pool funding available to Tasmania under the Medicare Agreement in relation to 1993-94 hospital activity.

I understand that the adjustments to the grant were partly due to factors outside Tasmania's control, in that they related to activity in other States.

There were concerns about the accuracy of the Tasmanian activity data which had been provided by the Department of Community and Health Services (DCHS) to the Commonwealth in February 1995, in relation to the financial year 1993-94, on a provisional basis only. The Commonwealth made adjustments based on that provisional data. These adjustments have been contested by the State.

The Commonwealth has since been supplied with corrected information which, together with revisions to the original Commonwealth adjustments, may result in a recoupment of part of the shortfall relating to 1993-94 funding component. However, a further adjustment is still to be made with respect to 1994-95 hospital activity data.

Monitoring procedures have now been strengthened through the establishment of a Commonwealth/State Agreements Committee within DCHS which is comprised of representatives of DCHS, the Department of Treasury and Finance and the Department of Premier and Cabinet. A Steering Committee made up of the Secretaries of these three Departments has also been established.

Building Better Cities Grant

Receipts estimated at $6 million were included in the 1994-95 Budget under the Building Better Cities Program, Item (L110), which is administered by the Department of Treasury and Finance.

On 1 March 1995 a receipt of $2.5 million related to Health Funding Grants was misposted to this Item. The error was undetected for some 4 months.

Of the originally misposted amount, $1.6 million was transferred to the Treasurer's Suspense Account (T836) pending resolution of final amounts due to the State for 1994-95 Health Funding Grants. That amount is still in Account T836.

The subject of timely monitoring of grants has previously been raised by Audit with the Department of Treasury and Finance.

Technical and Further Education Grants

Receipts estimated at $13.4 million were included in the 1994-95 Budget under Specific Purpose Grants for Technical and Further Education, Item (Y013). The Item is administered by the Department of Industrial Relations, Vocational Education and Training (DIRVET).

Actual receipts in relation to this Item during 1994-95 amounted to $14.5 million but $2.2 million of that sum which was to be applied to programs in the following financial year, was transferred by DIRVET to an account in the SD&TF, (T027) "Miscellaneous Commonwealth Grants - Technical and Further Education Account".

DIRVET's preferred treatment in a proposal to Treasury on 14 June 1995 was to make the transfer to the Treasurer's Suspense Account (T836). The Treasury advised on 21 June 1995 that the $2.2 million should be carried forward into DIRVET's Suspense Account by the use of an expenditure item in accordance with carry forward procedures now possible under the provisions of the Public Account Act 1986.

The events involved in this matter were apparently overtaken by approach of the end of the financial year and resulted in the unsatisfactory outcome from the actual treatment by DIRVET which not only understates by $2.2 million the amount shown in the Treasurer's Financial Statements as being received in relation to this category of grants during 1994-95, but also may have caused Account T027 to be used for an inappropriate purpose.

Statement No. 11 "Financial Assets" in the Treasurer's Financial Statements includes loans to the Mount Lyell Mining and Railway Company Ltd and investments in the Trust Bank, the disclosed values of which have declined during 1994-95 by $4.2 million and $12.4 million respectively. Further information on these disclosures are provided below.

Financial Assistance to the Mount Lyell Mining and Railway Company Ltd

Financial assistance was provided to the Mount Lyell Mining and Railway Company Ltd over the last 10 years with the objective of enabling the Company to continue operations at the Mt Lyell site in a climate of depressed mineral ore prices. The Company ceased operations in December 1994 and its mining leases have now been transferred to Copper Mines of Tasmania Ltd.

Subsequently, all outstanding issues between the Government and the Company were resolved through a "memorandum of understanding" (MOU). The MOU which was dated 28 June 1995 effectively terminates the provisions of the Mount Lyell Mining and Railway Company Limited (Continuation of Operations) Acts of 1985, 1987 and 1992 dealing with financial assistance to the Company and its subsequent repayment.

Under the MOU the Company will return $7.946 million to the State in 1995-96. That amount includes $0.230 million payable to the Director of Environmental Control in respect of environmental exemption fees.

This development means that the $4.3 million outstanding balance of assistance provided to the Company is not required to be paid in the future, except to the extent of a 50% share under the MOU of any compensation received by the Company in possible litigation against another party relating to the period covered by financial assistance from the State.

Deposits With the Trust Bank

Financial arrangements associated with the sale in 1991 of the former Tasmania Bank to the Savings Bank of Tasmania (now the Trust Bank) provided for the Government to deposit $25 million in a special deposit account with the Bank, to be called on in the event that any losses were incurred in respect to doubtful loans of the Tasmania Bank. Interest is paid on the balance of the deposit account, reckoned after an allowance for the doubtful loan debt component, on a normal commercial basis.

In addition the Government invested in a $10 million Special Capital Note which returns an annual dividend to the State.

During 1994-95 the Government and the Trust Bank entered into a Deed of Variation to the original Agreement. The Deed provides for the winding-up of the deposit account and a return of $12.645 million to the State from the $25 million initially deposited. This return is some $2 million greater than the amount which had been estimated as being recoverable as at 30 June 1994 when the contingent assessment of doubtful loans was disclosed as being $14.363 million.

Of the $12.645 million to be returned, $7.045 million is repayable on a day to be nominated in writing by the Secretary of the Department of Treasury and Finance. The remaining $5.6 million will become repayable on conclusion of specified litigation and subject to approval by the Reserve Bank