A better way

 

The previous posting Stop telling lies Barry tried to highlight the lack of understanding of budgetary issues confronting Tasmania, by drawing attention to a particular main stream media contribution. The website tasmaniantimes.com linked to the posting. The subsequent response, reproduced at the end of this note, certainly confirmed the lack of understanding.

Two issues arising are worth further comment.

First, the current system of a dual fund Public Account is not widely understood. The Public Account consists of the Consolidated Fund and also the Special Deposits and Trust Funds (SDTF).

In most cases the amounts in SDTF a/cs have been appropriated. The SPA a/c was a prominent example of a SDTF a/c.

The Consolidated Fund contains the balance of the Public A/c (PA). Withdrawals from the PA require appropriation unless they are reserved by law amounts (politicians’ salaries, benefit payments for retired RBF members for example).

At any point what had been appropriated far exceeded the amount of cash on hand or likely in the near future. Hence we had a situation where the SPA a/c had a large nominal balance but no cash backing whatsoever.

Even with the abandonment of the SPA a/c there are SDTF a/cs with large nominal balances but with no cash backing, the Risk Management A/c for instance. It is the Government’s aim to try and restore the cash balances as soon as possible, but that will require running cash flow surpluses which is proving difficult.

The Government is in the process of converting the Public Account into a single fund system. Existing SDTF a/cs are being wound down as is evidenced by the budget papers. Appropriations each year will hopefully reconcile with cash outflows and consequently government financial statement may become a little easier to understand.

Hence the first issue is hopefully being addressed.

The second issue is trying to glean information from budget papers which have evolved to such an extent that statements like P&Ls, balance sheets, and cash flow statements, all the usual that dominate annual reports for listed entities, are relegated to the appendices , and when, and more crucially if, readers survive the ordeal, they completely misinterpret the info. They need to be front and central in the budget papers with better explanations.

At present  budget papers are not designed to explain. The primary obligation is to provide the mandatory info however confusing it may be to readers.

When one of the State’s most experienced journos finds himself out of his depth in his chosen state of wilful ignorance in a glasshouse throwing stones, when anyone who questions him is labelled as a peddler of uninformed crap, it is confirmation that the presentation of the State’s financial predicament needs to be more accessible.

Cash flow statements present a better basis for trying to understand what is happening. The following from the budget papers sets out the operating cash flows of the Government. (Note: This is a truncated version. The amounts spent on investing in new plant and infrastructure is not included, nor is the cost of servicing borrowings which in any event is negligible):

Immediately it is obvious that the alarmist claim that benefit payments to retired public servants will be $500 million in 2013/14 is untrue, as superannuation expenses in total are only $375.5 million. This latter figure includes the costs of superannuation benefits of $233 million (the reserved by law amounts) plus the superannuation guarantee (SGL) contributions for all the current defined contribution (DC or accumulation) members. Total employee entitlements to be paid in cash are $2,090 million for 2013/14 and roughly 70% are accumulation members requiring 9.25% SGL support in 2013/14 which equals about $140 million.

Hence the total superannuation expenses of $375.5 million  comprises $233 million for benefit payments and approximately $140 million for current accumulation members.

If one were to exclude the costs of superannuation benefits from operating expenses on the basis they related to a past liability, the resultant figure would be the current net operating expenses.

If one were to exclude tied capital grants from the Feds (included in grants)  from cash receipts, the resultant figure would be the current operating income.

We need to make do with operating income, as our only other source of funds are borrowings which we can’t service at present, and capital grants which have to be spent specifically as intended.

The following chart shows how our operating outlays exceed operating income in the next 2 years. In other words the % of outlays relative to income exceeds 100%.

That's why our cash reserves are disappearing. In the last 2 years of the forward estimates the % falls just below 100% but if the past is a guide, the latter years of the forward estimates are little more than blue sky guesses.

The breakup of outlays can be seen in the following table.

Capex which in this instance includes investments in government business falls away over time. In the latter years it includes RHH expenditure. In the last 2 years, in 2015/16 and 2016/17, the % of operating income to be spent falls to 98% and 97% respectively . This reflects the Government trying to generate small cash surpluses in order to replenish the cash tin with the capital grants such as the RHH grants already received but spent on other operating items.

The payments of benefit  for retired public servants are listed as rbf%. The % will gradually rise to about 7% over the next 10 years or so.

The % spent on operating needs to fall to provide a sustainable structure. Either income needs to rise or expenses fall, or a combination of both. An operating expense % of 85% of operating income would comfortably leave enough to pay superannuation benefits, capex payments and service future borrowings which would add a much needed layer of flexibility.

The Government plan falls short. The Opposition alternative fiddles at the margin and avoids the issues. Growth if it eventuates will have only a tenuous effect on government finances in the next few years. The main stream media are too concerned with either promoting their favourites or reporting the ridiculous spectacle of Estimates hearings governed by Marquis of Queensberry rules that apply to adversarial battles between political parties which at a time of much needed transparent debate and honest discussion, insults and does a grave disservice  to the people of Tasmania desperate for a  better path and increasingly disillusioned with current explanations and solutions. 

 

Annexure: Comment and rejoinder published on Tasmanian Times.

From Barry Prismall:

Dear Tasmanian Times Editor,

I am happy to arrange a Budget briefing for John Lawrence, so he better understands what is a very complex document.

He says I am off the mark with state government superannuation contributions, when I put the annual cost at approaching $500 million, while he says it is more like $219 million in 2011-12, rising to $264.6 million in 2015-16.

Had he read the next couple of paragraphs in the Budget, following that table he used, he would have read where, yes, there is an agency contribution towards merging super costs - plus - a Reserve by Law contribution which in 2012-13 was $197.9 million. That sounds to me like a liability approaching $500 million.

If he turns to page A3.6 of Budget Paper Number 1 he might spot the extra Reserve by Law obligation on the government. 

On the now defunct Superannuation Provision Account, John says the $1.5 billion account was never a real lump of money. Tell that to Lara Giddings. How can a government spend money that you say doesn’t exist? But, they did. He also should inform the former Treasury Head Don Challen of this revelation, just so an expert can understand how the government spent fake money. He might care to read what Mr Challen said about the SPA, and the government’s management of it, on page one of The Examiner Newspaper on Budget day 2012.

In future, please don’t waste my time with such uninformed crap

Cheers,
Barry Prismall
June 6.

Reply from John Lawrence:

Dear Tasmanian Times Editor:

Barry Prismall needs to consider the possibility that he is wrong.

When the SPA a/c existed prior to 30th June 2012, appropriations and Reserved by Law amount were added to the SPA a/c. Payment to RBF for the Government’s share of pensions and lump sums (the employer contributions) were then subtracted from the SPA a/c. This can be seen in2011/12 Budget Papers for instance (see page 7.18 2011/12 Budget Paper No1)

With the abandonment of the SPA a/c the Governments share was paid as Reserved by Law amounts. The Government Superannuation Payments will be $236.1 million in 2013/14 (as per Table 6.5).
Barry also spied Reserved by Law superannuation amounts in Appendix 3 covering Consolidated Fund Estimates. The proposed outlay for 2013/14 is $233.1 million.

Almost identical, $236.1 million vs $233.1 million.  A coincidence? No it’s the same item presented slightly differently. Barry is right it is a complex document. All the need for a little more caution when trying to interpret it.

The difference between the Consolidated Fund estimate and the proposed outlays in Chapter 6 of the Budget Papers is explained by the fact that the former is prepared on a cash basis and the latter on an accruals basis. In other word the former is what is expected to be paid in cash, the latter is the actual amount incurred.

Barry however added the two figures together. He has double counted. There’s not “an extra Reserve by Law obligation” as Barry says, there is only a Reserved by Law amount. Since the abandonment of SPA it’s all Reserved by Law.

The Governments employer contribution in regard to unfunded superannuation is more easily understood from the Treasurer’s Annual Financial Reports. The 2011/12 Report on page 88 has a more accessible table.

The table lists the plan assets for the defined benefit fund, the funded portion. Each year the Government as employer pays its share of pensions and benefits. In 2011/12 the amount was $219 million. You will note this reconciles with the figure for 2011/12 in this year’s Budget Papers, in Chart 6.5.

The total payment to retirees is $331 million, but the Government only had to cough up $219 million. It’s not going to jump to $500 million next year!!

Barry’s reference to “fake money” and “money that doesn’t exist” shows a complete lack of understanding of the current budgetary process. There is a world of difference between amounts appropriated and cash spent. Just because an amount has been appropriated doesn’t mean there is cash available equal to the amount of appropriation. Appropriation is necessary to gain Parliament’s approval to spend, required in all cases except certain Reserved by Law items.

Funds are often appropriated so that if cash becomes available the necessary parliamentary approval is already in place so the Government can just go ahead and spend.

As at 30th June 2012, before the abolition of the SPA a/c Parliament had appropriated $2,170 million more than the cash available. Confirmation of this can be found by looking at the balance of the Temporary Debt Repayment (TDR) a/c which recorded all the internal borrowings. By far the largest amount that had been appropriated was the SPA a/c of $1,520 million as at that date. As shown in the graph the amount of internal borrowings always exceeded (except for a brief occasion in 2008 and 2009) the amount in the SPA a/c. The SPA a/c in other words was never cash backed. It was never “a real lump of money” to use Barry’s term. What Ms Giddings believes and what she says aren’t necessarily the same and in any event what she thinks and/or says is hardly of any relevance in this matter. As for Mr Challen’s views, I’d be interested in his precise words, rather than relying on a newspaper report at the time. There’s nothing surer than if the journo doesn’t understand what he’s writing about, the story is more likely to be “uninformed crap”.

Editor, I regret that some people may now believe you to be a publisher of “uninformed crap”. I hope I have disabused them of this notion and you won’t require an apology. Barry will no doubt set the record straight with his readers and that should be sufficient.

Barry should avail himself of the Treasury briefing at the earliest opportunity. We need a more enlightened public discussion of our woes.

Sincerely,

John Lawrence