Table of Contents
KEY FINDINGS
THE PUBLIC ACCOUNT
Basis of Accounting
Treasurer's Financial Statements
Objectives of This Report
Financial Management Reforms
MEASURING PERFORMANCE IN THE PUBLIC ACCOUNT
Net Financing Requirement
Changes in Borrowings Relative to the NFR
Active Cash Management
RETIREMENT BENEFITS FUND SCHEME - FUNDING OF LIABILITY
Emergence of Funding Policies
Payments into Superannuation Provision Account T780
Proposed Full Funding of RBF Scheme Liability
TASMANIAN STATE SERVICE WORKERS' COMPENSATION SCHEME
DECLINE IN VALUATION OF THE STATE'S EQUITY IN THE TT-LINE COMPANY PTY LTD
DISCLOSURE OF THE STATE'S LIABILITY FOR EMPLOYEE ENTITLEMENTS
KEY FINDINGS
On 13 September 1996 an unqualified audit report was issued on the Treasurer's Financial Statements for the 1995-96 financial year.
(Page 4)
Expenditure from the Special Deposits and Trust Fund (SD&TF) is not subject to appropriations by the Parliament and up to 1995-96 has not generally received comprehensive coverage in supporting Budget Papers. This has been largely redressed with the change in 1996-97 to Outputs based Budgeting and the mandatory use by agencies of operating accounts in the SD&TF for expenditure of appropriations out of the Consolidated Fund.
(Page 3)
The financial management objective announced by Government in 1992 of achieving a Net Financing Requirement (NFR) of "zero" in the Consolidated Fund by 1996-97, was reassessed in 1994. The NFR included in the 1996-97 Budget is $29.8 million. Implicit in the current 5 year fiscal strategy is that the NFR should not exceed $35 million in any year.
(Page 5)
Although the NFR for the Consolidated Fund over the last four years has been met from new borrowings totalling $249 million, the total State Debt has actually reduced by $17 million over that time in absolute terms due to influences not reflected in Consolidated Fund transactions.
(Pages 5 to 7)
Active management of the State's unfunded Retirement Benefits Fund liability in respect of employees in the inner-Budget sector started only from the time an estimate of $1.3 billion for that liability was first reported in the 1990-91 Budget Papers. The Government's objective is to eliminate that liability, estimated as being $1.2 billion at 30 June 1995, within 40 years. It hopes to achieve that goal within 20 years with the assistance of annual payments made centrally out of the Consolidated Fund through a reserved by law Item.
(Pages 9 to 11)
Despite the intention that the Tasmanian State Service Workers' Compensation Scheme be fully-funded, estimates of the State's unfunded liability for future claims had progressively increased to a peak of $52.796 million at 30 June 1995. The reduction in the liability during 1995-96 to $47.221 million, as reported in the Treasurer's Financial Statements, is the first recorded in the history of the Scheme and is due in part to the Scheme's positive underwriting result for 1995-96 of $2.126 million.
(Page 13)
The State's 100% shareholding of $94.568 million in the TT-Line Company Pty Ltd when matched with State Debt of $49.136 million applied to acquiring the Bass Strait ferry Spirit of Tasmania, initially valued at $167.886 million, provided the State with a net investment value in the Company of some $45 million. Following nearly 3 years of operations, the vessel was revalued to its market value of $114.213 million in June 1996 and the State's equity in the Company was reduced to $43.768 million. When that equity is matched with the related State Debt of $45.801 million at 30 June 1996, the net value of the State's investment in the Company is now negative by around $2 million compared with the initial positive net value of $45 million.
(Pages 15 and 16)
Estimates of the State's unfunded liability for inner-Budget employees' entitlements to paid long service leave, recreation leave and sick leave are not aggregated and reported in the Treasurer's Financial Statements. Disclosure of these liabilities is made in each agency's financial statements. These totalled some $172 million at 30 June 1995 and are largely unfunded.
(Pages 17 and 18)
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 and up to 1995-96 has not generally received comprehensive coverage in supporting Budget Papers. This has been largely redressed with the change in 1996-97 to Outputs based Budgeting and the mandatory use by agencies of operating accounts in the SD&TF for expenditure of appropriations out of the Consolidated Fund.
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 Public 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 13 September 1996 I issued an unqualified audit report on the Treasurer's Financial Statements for the 1995-96 financial year. A copy of my audit report was published with those Statements.
Objectives of This Report
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 1996. The Treasurer's Financial Statements for 1995-96 together with the documentation accompanying the recently presented 1996-97 Budget, provide adequate disclosure in that regard.
The main objectives of this Report are to provide information on certain transactions or balances included in the Treasurer's Financial Statements which have been selected for comment due to some unusual issues involved or because of their public interest potential.
Financial Management Reforms
My previous Reports to Parliament on the Public Account have drawn attention to various recent financial reforms affecting the Account and made reference to further potential reforms. At those times there was no documented strategy publicly available to indicate the context in which reforms were being progressed. That shortcoming was recently redressed through the issue in July 1996 of a booklet titled Tasmania's Financial Management Reform Strategy with the slogan "towards a more commercial approach to managing public finances".
That publication restates the reforms achieved in recent years and outlines numerous proposed reforms, many of which are already in their preliminary stages, such as the requirement for assets controlled by departments and statutory authorities to be valued uniformly using the "deprival" method and for the adoption of accrual reporting by departments. While it speculates about the possibility of extending the reforms to include reporting on an accrual basis the financial performance and financial position for the State as a whole, it does not include any firm commitment to such whole-of-government reporting. However it does refer to the continuing assessment of the value of such reports before any actual introduction takes place.
The booklet is extremely informative from the perspective of various stakeholders and anyone having an interest in public finances.
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.
Net Financing Requirement
The Net Financing Requirement (NFR) shown in Statement 2 of the Treasurer's Financial Statements should not be seen as the sole indicator as to the management of the State Debt or the financial performance of the Public Account.
The NFR is merely a construct for financial reporting purposes which highlights the size of the gap existing at the end of a financial year between Consolidated Fund receipts and expenditure which was filled by borrowings. It is not a reflection of the performance of the Public Account as a whole.
The NFR style of presentation has been used since 1989-90 and has greatly assisted in firmly establishing debt control as a key issue in public sector financial management and successive Budget strategies.
A financial management objective announced by Government in 1992 was to achieve a NFR of zero by 1996-97. That objective was reassessed in 1994.
The estimated NFR included in the 1996-97 Budget is $29.8 million. That estimate is tied to more objective debt management indicators than simple reliance on the NFR.
Implicit in the current Government's 5 year fiscal strategy (as outlined in 1996-97 Budget Paper No 1, pages 4-6) is that, during its term, the NFR should not exceed $35 million in order to achieve the June 2000 net debt targets outlined in the strategy. They are that:
- Real General Government net debt per Tasmanian Household will be reduced by one fifth between June 1994 and June 2000; and
- General Government net debt as a proportion of Gross State Product will be reduced from 14.9 per cent to 10 per cent over the same period.
When the NFR is fully met from new borrowings, as has been the case every year since 1990-91, those new borrowings directly influence the level of total State Debt. However, it is important to understand that even under these circumstances the NFR does not reflect the actual change in total State Debt during the year. This is illustrated below.
Changes in Borrowings Relative to the NFR
The following table compares changes in the levels of State Debt during the last 4 years with the actual NFR reported in the Treasurer's Financial Statements.
Financial Level of State Debt Reported
Year Start of Year End of Year Increase or NFR
(Decrease)
$million $million $million $million
1992-93 1 877 1 959 82 * 119
1993-94 1 959 1 920 (39) 53
1994-95 1 920 1 859 (61) 43
1995-96 1 859 1 860 1 34
Change in Level of State Debt (17)
Total NFR for the 4 years 249
* The NFR for 1992-93 included a need to fund the deficit of $17m remaining in the Consolidated Fund as at 1 July 1992 from prior years. In all subsequent years the Consolidated Fund has been balanced exactly to "zero" through the use of borrowings.
It can be seen from the above that there is not a direct relationship between the changes in reported levels of State Debt and the NFR in any financial year. This is due to various aspects of debt management actually occurring outside of the Consolidated Fund. They include:
- application of proceeds from major asset sales to debt reduction;
- receipt of Commonwealth Compensation funds for purposes of debt redemption;
- reclassification as State Debt of previous borrowings by certain statutory authorities;
- use of active debt management strategies; and
- fluctuations in the levels of internal borrowings through the SD&TF.
Internal borrowings, using the technique of overdrawing accounts in the SD&TF, have been a major feature of the State's financial management strategy since 1990-91. The levels of internal borrowings, used mainly in financing payments to redundant employees, have been as follows:
June 1992 June 1993 June 1994 June 1995 June 1996
$90.7 m $83.8 m $72.4 m $78.0 m $87.6 m
Active Cash Management
Due to the net credit balances which are typically available in the accounts comprising the SD&TF, there is not a need during any financial year for the State to maintain borrowings at the levels reported in the Treasurer's Financial Statements at 30 June.
At the start of the financial year much of the liquidity available in short-term investments is used to redeem short-term borrowings. During the year the available cash holdings are actively managed at a level which minimises the need for borrowings. Because interest on borrowings is typically higher than interest on investments for a similar term, the consequential savings amount to the difference between the amount of interest which would have been earned by investing the cash reserves and the amount of interest which would have been paid on borrowings of an equivalent amount.
Conversely, at the end of the financial year, an amount is borrowed "overnight" to re-establish total borrowings at the level required to bring the balance of the Consolidated Fund to nil. The amount borrowed overnight at 30 June 1996 for this purpose was $104.5 million.
This arrangement is artificial to the extent that the amount borrowed is not required to finance any obligations to external parties. However, since the borrowing is essentially only overnight, it is virtually costless and thus consistent with sound cash management practice.
At least one government business enterprise and one city council in the State engage in similar overnight borrowing activity at 30 June in each year albeit on a considerably smaller scale.
RETIREMENT BENEFITS FUND SCHEME - FUNDING OF LIABILITY
The Retirement Benefits Fund (RBF) Scheme incorporates the principal superannuation arrangements applying to Tasmania's State Employees the majority of whom are employed in departments and agencies comprising the inner-Budget sector of Government activity.
Emergence of Funding Policies
The unfunded superannuation liability of the State in respect of the past service of inner-Budget employees, estimated to be $1.2 billion as at 30 June 1995 (most recent estimate), is only 35% less than the State Debt at the same date. Serious attention to the management of both of these liabilities only started around six or seven years ago.
However, while the reporting of State Debt has always been extensive and reforms in its management well documented in successive Budget Papers, such has not been the case with the unfunded superannuation liability.
In fact, reference to the extent of the superannuation liability was first made in the 1990-91 Budget Papers, with just one page being dedicated to the topic. The unfunded liability was then reported as being $1.3 billion. In that year the very first provision was made in the Public Account for funding superannuation entitlements of State Employees but that provision was limited to only the entitlements under the then new, and now discontinued, Superannuation Accumulation Fund (SAF) Scheme. In 1991-92 further provision was made in relation to the liability arising from the emerging Superannuation Guarantee Charge (SGC) legislation which required all employers to provide their employees with a minimum level of superannuation support.
No provision was made by the State for the RBF entitlements of inner-Budget employees until 1994-95 when the Scheme was redesigned to incorporate SAF and SGC entitlements and agencies were required to make an employer contribution equivalent to defined percentages of employees' salaries into the Superannuation Provision Account T780 in the SD&TF. During that year the provisions established for SAF and SGC were rolled into Account T780.
A shortcoming of the above mentioned funding initiatives is that structurally they are designed to cover entitlements relating only to employees' current service. They lack a component which will allow a catch-up for employees' past service liability to be achieved. This shortcoming is being progressively redressed centrally through payments to Account T780 out of a "reserved by law" Item in the Consolidated Fund.
Payments into the Superannuation Provision Account T780
The employer share of emerging costs of pensions and lump sums paid by the RBF Board was paid from the Superannuation Provision Account in 1994-95 and 1995-96 and not from the "reserved by law" Item R025 that was previously used to pay these costs. A new Item R069 was established to make annual payments 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 199495 and 1995-96 payments from Item R069 to Account T780 were $24.2 million and $34.2 million respectively.
The balance of Account T780 was further increased in 1995-96 by adjustments totalling $23.3 million. These adjustments were equivalent to lump sum RBF entitlements paid to redundant employees from that Account during 1994-95 and 1995-96. Up to and including 1993-94 such lump sums were charged to the respective redundancy accounts in the SD&TF. Following the establishment of Account T780 that policy was discontinued and the payments were made from T780 instead of the redundancy accounts. Towards the end of 1995-96 the original policy of funding lump sum RBF entitlements of redundant employees out of redundancy accounts was reintroduced with retrospective effect. The adjustments of $23.3 million gave effect to that reversion to original policy by transferring that amount from the Agency Targeted Separation Program 1994-95 Account T770 to Account T780.
The intended effect of this treatment is that lump sum RBF entitlements of redundant employees be recognised as a component of their redundancy costs rather than as the emergence of superannuation entitlements.
According to 1996-97 Budget Paper No 1, the annual payments from the reserved by law Item to Account T780 are planned to increase over the next five years from $31.9 million in 1996-97 to $51.0 million in 2000-01. These proposed payments together with agency contributions and interest earned on the balance in the Account, less benefit payments, are expected to produce a provision of some $392.9 million by 30 June 2001.
Proposed Full Funding of RBF Scheme Liability
While the Government's stated objective is to eliminate the unfunded liability within 40 years, it hopes to achieve that goal within 20 years.
The Audit Office understands that the estimated future receipts into Account T780, including the payments expected to be made centrally from the reserved by law Item R069 over the next 5 years, are not necessarily formulated to eliminate the unfunded liability over the next 20 years. It is further understood that the size of any centrally made annual payments to Account T780 beyond 2000-01 will be reconsidered having regard to the unfunded liability situation at the time. The amounts of these annual centrally made payments that are in excess of actual benefit payments, arise from a policy decision and are not required legislatively notwithstanding that they have been designated as being "reserved by law".
Since the State's superannuation liability was first reported in the 1990-91 Budget Papers, the management of that liability has increased substantially. For example, the RBF Scheme has been redesigned with, according to the most recent actuarial report, a significant downwards impact on future unfunded liability. In addition, much more information is being provided on the management of the State's liability. As an indication, some six pages were dedicated in the 1996-97 Budget Papers to RBF liabilities, with another five pages of description concerning superannuation liabilities generally and specific comments on the smaller schemes applying to entitlements of members of Parliament and Judges.
The Government has also proposed an inquiry into superannuation that may have significant long-term effects on future superannuation costs.
TASMANIAN STATE SERVICE WORKERS' COMPENSATION SCHEME
The Tasmanian State Service Workers' Compensation Scheme was established with effect from 1 July 1989, by Cabinet Decision, as a fully funded self-insurance system to provide for work related injury claims made by employees of participating agencies.
Despite the intention that the Scheme be fully-funded, estimates of the unfunded liability had progressively increased to a peak of $52.796 million at 30 June 1995. The reduction in the liability during 1995-96 to $47.221 million, as reported in the Treasurer's Financial Statements, is the first recorded in the history of the Scheme.
The Scheme is a non-legislative arrangement which is oversighted by the Tasmanian State Service Workers' Compensation Committee with claims being processed by a Fund Manager contracted from the insurance industry. Administrative support is provided by the Department of Treasury and Finance and the State Actuary.
Contributions by agencies are credited to the Tasmanian State Service Workers' Compensation Account T837, an account controlled by the Department of Treasury and Finance and maintained in the SD&TF. The costs of claims and other expenses such as the Fund Manager's fee, the cost of externally provided catastrophe insurance cover, and the Workers' Compensation Board levy, are paid from the Account.
In the Treasurer and Minister for Finance section of my Report to Parliament No. 2 of 1995, I made detailed reference to the increasing unfunded liability for outstanding claims of the Scheme and the lack of comprehensive reporting of its transactions and liabilities.
Action was finally taken in 1994-95 to report the Scheme's transactions and balances on an accrual basis and in compliance with Accounting Standard AAS26 "Financial Reporting of General Insurance Activities". The resulting financial statements were audited and an unqualified audit report was issued on 23 January 1996. Financial statements for 1995-96 have already been prepared and are currently being audited.
These unaudited statements disclose an Underwriting Result of $2.126 million surplus for 1995-96 compared with a deficit of $18.532 million for 1994-95. That surplus has contributed to the reported reduction during 199596 in the State's estimated unfunded liability under the Scheme.
DECLINE IN VALUATION OF THE STATE'S EQUITY IN THE TT-LINE COMPANY PTY LTD
Statement 11 in the Treasurer's Financial Statements provides information on the State's financial assets.
That Statement is not intended to be a representation of the State's equity in various physical assets owned or controlled by its departments and/or statutory authorities. The Statement only summarises those financial assets which are in the nature of deposits and securities attributable to the State through investments and loans made in the course of managing the Public Account, by special agreement, or by legislation.
A major investment included in the Statement relates to 94.568 million fully paid ordinary shares with a par value of $1 per share, in the TT-Line Company Pty Ltd.
The shares which are shown in the Statement at a value of $94.568 million were allocated to the Treasurer and the Minister for the TT-Line during 199394 in the course of the State transferring all assets and liabilities of the former TT-Line (a State Authority) to the TT-Line Company Pty Ltd (a company formed under the Corporations Law). The nominal value of the shares was reckoned to be the net value of assets and liabilities assumed by the Company.
At that time the State assumed as part of the State Debt, borrowings by the Transport Commission amounting to $49.136 million incurred in the acquisition of the vessel Spirit of Tasmania.
On the basis of its shareholding in the company ($94.568 million) and assumed borrowings ($49.136 million) the net value of the State's investment as sole shareholder of the Company was some $45 million. This was based on the valuation of the vessel at its transfer value of $167.886 million.
At 30 June 1996, two years and eight months after the formation of the Company, the shareholders equity reported in the financial statements had reduced to only $43.768 million primarily due to the revaluation as at 26 June 1996 of the Spirit of Tasmania to a market valuation of $114.2 million.
The revaluation was in accordance with the Company's policy of obtaining an independent valuation of its vessel every three years.
In the opinion of the Company's directors the writedown was a result of the following factors:
- The English Channel Tunnel captured 40% of the cross Channel market thus creating excess shipping capacity
- An increase in the number of ships available for sale in the Baltic region
- A general decline in the value of roll-on roll-off ferries
- International currency valuations
- Establishment costs written off.
The State Debt at 30 June 1996 includes outstanding principal of $45.801 million on the debt ($49.136 million) previously assumed by the State in the course of acquiring the Spirit of Tasmania and corporatising the former TT-Line.
When that debt is matched with the State's equity of $43.768 million in the Company following the June 1996 revaluation of the vessel, the net value of State's investment in the Company is now negative by around $2 million compared with the initial positive net value of $45 million.
No dividends have been paid by the company since it commenced operations.
DISCLOSURE OF THE STATE'S LIABILITY FOR EMPLOYEE ENTITLEMENTS
Statement 12 in the Treasurer's Financial Statements provides information on selected contingent and other liabilities.
While the Statement includes actuarily determined estimates of employee entitlements to superannuation benefits and compensation for work related injuries, it does not include estimates of the State's liability for various types of paid leave of absence such as long service leave, recreation leave and sick leave.
Disclosure of these liabilities, calculated in accordance with Treasurer's Instructions, is required to be made separately in each agency's financial statements which are made available to Parliament before the end of November in each year as a component of agencies' annual reports. The details of these liabilities relating to some agencies are typically still not available in a reliable form at the time of preparation of the Treasurer's Financial Statements.
To obtain an indication of the extent of these liabilities Audit reviewed the details published in agencies' and regional health boards' 1994-95 audited financial statements and found that the liability relating to sick leave was generally not reported due to its non-materiality. However the liability for long service leave and recreation leave was significant; this is summarised as follows:
Long Service Recreation Total Leave
Leave Leave (excluding
Sick Leave)
$ million $ million $ million
Government Agencies 79.808 31.086 110.894
Regional Health Boards 34.026 27.008 61.034
Total Inner-Budget 113.834 58.094 171.928
Note: The basis of valuing the long service leave liability varies between agencies and regional health boards. Agencies' calculations are at nominal rates of pay for pro-rata and actual entitlements after 7 years service. The boards' calculations are in accordance with Accounting Standard AAS30 which requires recognition of estimated liability for service prior to 7 years (preconditional entitlements), as well as entitlements after 7 years. The Standard also requires some discounting of nominal rates of pay to present values.
Without further detailed examination of previous years' reported liability for leave entitlements it is not possible to determine whether the liability is increasing overall or falling.
No provision is made to fund the liability for these entitlements except by some business units which operate on an accrual accounting basis and have cash-backed provisions. However the overall impact of that funding would not be considered material in the context of the overall unfunded liability for entitlements to leave.
It is understood that consideration is being given to requiring agencies to make provision for their employees' entitlements to long service leave.
Whilst such a requirement would, at least in the long term, redress the present lack of funding, there are some practical difficulties to be resolved including the question of cost-sharing of long service leave payments to employees who accumulated their entitlements in more than one agency.
In recent years systematic funding has been provided centrally to finance the one extra pay which occurs in some years. Funding for the so-called "27th pay" is arranged in the Payroll Provision Account T825 within SD&TF and is broadly equivalent to the proportion of payroll that would be accrued as an expense by organisations using accrual accounting. The balance in that Account at 30 June 1996 was $9 million. A 27th pay will next fall in the year 2003-04.
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