Tuesday, 7 December 2010

A state of delusion

Reading transcripts of Government Business Scrutiny Hearings can be boring.

But it can also be revealing. Sometimes it’s the questions. Other times the answers. Sometimes it’s the non answers.

Take this question by shadow  Treasurer Peter Gutwein to Transend’s new Chairman, Mr Challen.
“If I could, Minister, address this to the chairman then, who obviously has a lot of experience in this area. The State Government have obviously taken steps with the SPA to look at what it can do to fund the unfunded obligation in regard to the RBF at a State government level. Has there been any attempt to look at what could be done within this company because it appears to me, using broad numbers, that we have around a $4 billion unfunded RBF amount at a State government level and then we have the SPA which offsets that and we are planning to pay the whole thing out in 2035? The SPA at about $1.5 billion is roughly 35 to 40 per cent of the total unfunded component, yet here we have only a funding balance of $12 million to a liability of $56 million. Just looking at the SPA and the way that the Government and Treasury have been managing the RBF, they, even with a significantly unfunded portion at the moment, are planning to nail it by 2035. Here, the unfunded portion in percentage terms seems to be dramatically larger and I am wondering when this is going to become a problem for the company or how that is going to be managed.”

Peter is confused between the funded portion representing Members’ contributions and earnings thereon, and amounts set aside by Government in accounts such as SPA to offset and hopefully extinguish the unfunded amount. It’s a pretty dumb misunderstanding, for a Treasurer-in-Waiting, a bit like a 3 year old getting mixed up between Santa and the Easter Bunny.

Peter’s quite correct in identifying a funded amount of $12 million and a gross liability of $56 million. But the funded amount is from employees, not the employer, Transend. Transend’s unfunded amount is about 78%. Four years ago it was 70%. Readers interested can verify these figures on p 44 of Transend’s Annual Report http://www.transend.com.au/download/D10-83350

I’m not sure as to Peter’s concentration span, but if he made it through to page 6.19 of Vol 1 of the 2010/11 Budget he would have noticed that as from 1st July 2010, the State Actuary determined that the employer share of benefits paid from the defined benefit scheme will increase from 70% to 75%. The balance of benefit payments is sourced from the funded bit from employees.

Transend does not set aside amounts to pay unfunded liabilities. It has a reasonably strong operating cash flow. In 2010 its operating cash surplus was $101 million and its unfunded super liability only $44 million. It is well able to meet commitments on an emerging cost basis.

Transend was only required to pay $478,000 as its share of benefits during 2009/10.

Peter’s other major misunderstanding is that funds appropriated into the Government’s SPA account of $1.5 billion approximately, are still there.

They’re all gone as Ruth Forrest MLC has forcefully pointed out recently, unlikely to be replenished during the term of the current Government, and certainly any subsequent Government if Peter as Treasurer implements the suite of promises made during the March election campaign.

Peter may be confused by the term Superannuation Provision Account. To accountants, a ‘provision’ is a liability of uncertain timing and uncertain amount. For example a Provision for Annual Leave. Or Long Service Leave. Or Income Tax .But a fund maintained by regular payments or contributions which will eventually pay off an amount owed is more akin to a Sinking Fund. A Sinking Fund that is underwater and likely to remain so is perhaps an apt title for the SPA.

The British Government set up a similar Fund to SPA to help pay off the National Debt in the 1700s, but as with our SPA a/c, it didn’t work because Ministers kept raiding the Fund. Prime Minister William Pitt legislated to protect the Fund by placing its administration in the hands of Commissioners for Reducing the National Debt.

Wikipedia has some interesting background on sinking funds:

“The sinking fund was first used in Great Britain in the 18th century to reduce national debt. While used by Robert Walpole in 1716 and effectively in the 1720s and early 1730s, it originated in the commercial tax syndicates of the Italian peninsula of the 14th century to retire redeemable public debt of those cities.

“The fund received whatever surplus occurred in the national Budget each year. However, the problem was that the fund was rarely given any priority in Government strategy. The result of this was that the fund was often raided by the Treasury when they needed funds quickly.

In 1772, the nonconformist minister Richard Price published a pamphlet on methods of reducing the national debt. The pamphlet caught the interest of William Pitt the Younger, who drafted a proposal to reform the Sinking Fund in 1786. Lord North recommended “the Creation of a Fund, to be appropriated, and invariably applied, under proper Direction, in the gradual Diminution of the Debt.” Pitt’s way of securing “proper Direction” was to introduce legislation that prevented ministers from raiding the fund in crises. He also increased taxes to ensure that a £1 million surplus could be used to reduce the national debt. The legislation also placed administration of the fund in the hands of “Commissioners for Reducing the National Debt.

“The scheme worked well between 1786 and 1793 with the Commissioners receiving £8 million and reinvesting it to reduce the debt by more than £10 million. However, the advent of war with France in 1793 “destroyed the rationale of the Sinking Fund” (Evans). The fund was abandoned by Lord Liverpool’s government only in the 1820s”.

About a fortnight ago Treasury released a Review of Tasmania’s Financial Management Framework. As a result it is possible the system of multiple trust funds and deposits accounts currently operated by Government will be superseded. The SPA could well disappear. That may obviate the need to repay amounts back into SPA but the unfunded super liability will remain.

The State requires a serious discussion about the way forward, so it is incumbent on the Alternative Treasurer to bring himself up to speed as to how the unfunded super liability, which comprises 80% of the General Government’s debt, actually works, and stop deluding himself that the $1.5 billion in the SPA account actually exists and will be available for its intended purpose. It’s not a trifling amount for a population of only 500,000.
It wasn’t however the only example of delusion on display during Government Business Scrutiny hearings.

Forestry Tasmania (FT) continues to report the costs of its unfunded defined benefit liability differently than other GBEs/SOCs.

Apart from the General Government sector which has an unfunded liability of $4.5 billion at 30th June 2010, most of the remaining unfunded liability is with the 3 energy companies and FT. At 30th June 2010 Hydro had an unfunded liability of $323 million, Aurora $84 million, Transend $44 million and FT $122 million.

Each year in the case of the energy companies the costs of the unfunded super are recorded in the accounts, some as expenses in the P&L in order to calculate an operating profit figure with the balance included as a non operating adjustment in the further calculation of a comprehensive income figure. The General Government sector does likewise; it includes a nominal interest amount in the calculation of its Net Operating Result and then includes other movements in the unfunded liability in the further calculation of the Comprehensive Result.

In 2010 Hydro included $20.5 million as a cost of unfunded super in its profit calculation and a further $24.3 million in calculating a comprehensive income figure. In the case of Aurora the figures were $6.4 and $11.5 million respectively and for Transend, $3.2 million and $6.2 million.

In the case of FT the figures should have been $8.3 and $11.1 million. But FT didn’t include anything in the calculation of operating profit, or to be more accurate in FT’s case, the calculation of operating loss. It was all included as part of the comprehensive figure of a $305 million loss.

The non inclusion of any costs for defined benefits members and the costs of their unfunded liability in the calculation of operating profit is quite misleading. But it did enable Mr Kloeden to claim “the operating loss was $8 million, a relatively modest amount compared to the losses incurred by other forestry companies some of which, particularly those in the MIS sector, were unable to survive.”

Kim Booth asked a question regarding the exclusion of the costs of unfunded super from the calculation of operating profit. “There does not seem to be a cost of the defined benefits that is not funded in the headline profit that you are listing. You are treating it differently from the way Aurora does ......”, he asked.

Mr Gordon replied “......So the approach we have taken - and it was discussed with you in general - is effectively to have that separately reported item which comes in - changes in superannuation, unfunded liability - after our operating profits, so they are reported in the comprehensive statement of income as increase/decrease…”

It may satisfy accounting standards but it’s nonsense to pretend that all the costs of employees’ defined benefits and the cost of FT’s largest liability shouldn’t form part of the calculation of operating profit. All stakeholders including employees need a more honest appraisal about FT’s position.

FT actually contributed $6 million to RBF in respect of its defined benefit obligations in 2010 but this didn’t appear in the P&L as it was simply a reduction in the unfunded liability.

There is an amount of $13.7 million that FT has set aside to help with meeting FT’s unfunded liability (a SPA account), but this is expected to disappear pretty quickly if FT is restructured in any way and operating cash flow remains negative. There will be a continuing battle to pay in excess of $6 million each year given that the 2010 operating cash deficit was $12 million. This was partly covered by pawning the motor vehicle fleet for $5.5 million and spending some TCFA funds. Plans B and C won’t be available again.

Reading the Hansard record of FT’s scrutiny hearing, it’s hard to escape the conclusion FT is still in a state of denial. The Auditor General remarked this year “It is not sustainable for Forestry to generate negative cash from its operating activities, a situation management and the Board must address. Management are keenly aware of this position and are monitoring operations closely. We are advised that management is developing longer term strategies to maintain future cash flows.” Nothing of substance was revealed during the scrutiny hearings.
Remarkably only Mr Booth addressed the matter of the financial accounts which recorded the largest loss of any GBE ever, so I’m told. Mr Gutwein and Mr Sheldon took turns in arguing petty political trivia with a willing Mr Green, Ms White and Mr Wightman dutifully wasted as much time as possible with Dorothy Dixers.

It’s little wonder the Upper House has decided to establish ongoing sessional committees as a way of holding the Government and its wholly owned subsidiaries to account on a more regular basis.

FT is more unprofitable than it publicly admits; its operating cash flow is negative which means its large unfunded super liability is particularly burdensome.
Prayer mats and rosary beads might be welcome Xmas gifts for FT’s Directors.

Mr Gutwein needs a few accounting lessons.


No comments:

Post a Comment