NEW: PPM statement on finances

Editor’s note: The following is a statement released Wednesday by Opposition Leader Kurt Tibbetts regarding the state of the country’s finances.

I am making this statement in response to a statement made by Hon. Kenneth Jefferson, Financial Secretary, on 1st July regarding the government’s financial position.

First, I wish to thank the Financial Secretary for finally, albeit belatedly, directly addressing the issue of the state of government finances. However, it remains a mystery why he chose to do so only after and not during the recent debate in the Legislative Assembly when the new Government sought and obtained approval for appropriations totaling $573M for the first 4 months of the new fiscal year. Might it be because he did not wish to have his statement made the subject of scrutiny and debate in the House?

As we suggested during the recent debate in the House, the Financial Secretary owes the country and the previous administration which I led an explanation for the huge variance in the projections which he gave to Cabinet and to Finance Committee in March of this year and the position which he has now stated. This is even more necessary since he later confirmed those earlier projections in a Cabinet Note dated 30th April which he presented to Cabinet on 5th May. Even now, after all this time he has still not provided a satisfactory explanation.

With the greatest of respect, the statement the Financial Secretary made on 1st July does not explain why he would tell Cabinet and Finance Committee that the government was projecting a $29M deficit and total cash reserves of $126M as at the end of June this year if he did not believe that to be the case. Is the Financial Secretary in the habit of giving statements and assurances to the Cabinet, to Finance Committee and the Legislative Assembly of this country which he does not believe to be true? If so, which of his statements and assurances are true and which are not?

I propose to deal in some detail with the various assertions which the Financial Secretary has made, many of which are presented as ‘facts’. But I wish to deal first with the appearance given by the Financial Secretary that my administration knew there would be an operational deficit of at least $68M at the end of the 2008/9 fiscal year but pretended that it would be $29M; that he told us so and therefore he is absolved for all responsibility in this matter.

It is true that on 9th February, as part of the lead up to the preparation of the 1st Supplementary Annual Plan and Estimates which were presented to Finance Committee on 20th March, the Portfolio of Finance and Economics provided ministers with a forecast predicting an operating deficit of $68M at the end of June, if nothing was done to improve revenue collections and expenditure was not drastically reduced. The important point was:’if nothing was done‘. My administration was adamant that something had to be done and we made that clear to the Financial Secretary and to all Chief Officers. As the Financial Secretary has acknowledged, my colleagues and I took the position that such a deficit was unacceptable and drastic measures had to be taken to improve both the deficit and cash position.

What then followed was a huge effort involving many people to make the changes necessary to avoid the huge deficit predicted. The Financial Secretary and his staff were major actors in this exercise. As the Financial Secretary acknowledged, during February and March 2009, at least 7 long and arduous meetings were held with Chief Officers, Chief Financial Officers and other accounting staff as well as consultation with the statutory authorities and government companies. These were all aimed at finding ways of significantly reducing the predicted deficit. As far as my administration was concerned, this was a legitimate effort to reduce the predicted operational deficit. It was not some exercise in deception as the Financial Secretary seems to infer in his statement. At least, it was not so on our part. What he intended or perceived the purpose of the exercise to be is a matter which the Financial Secretary needs to explain, especially since he and his office played the key role in the exercise. At the end of this protracted and difficult exercise, a revised budget position was arrived at which placed the projected deficit at $29M at the end of June, 2009 and overall cash reserves at $126M as at end of June, 2008. From my administration’s perspective this was far from ideal, but based on the work that had been done and the assurances of the Financial Secretary we regarded this as the realistic position. We had to face the fact that the government would be running an operational deficit at the end of the fiscal year and we would have to make this announcement to the country in advance of the impending General Elections.

The Financial Secretary has been at pains in his statement to distance himself from this matter, essentially inferring that elected ministers fabricated the projections and that he told us that there would be a $68M deficit. This is both untrue and an abdication of his responsibility as Financial Secretary to provide the Cabinet, Finance Committee and the Legislative Assembly with sound, objective and truthful advice in relation to the finances of government. The veracity of the Financial Secretary’s claims must be considered against the background of the following incontrovertible facts:

The projections and the attendant Supplementary Budget were prepared by the Financial Secretary and his office, not by the elected ministers.

The projections and Supplementary Budget were formally presented to the Cabinet by the Financial Secretary to be approved for presentation to Finance Committee.

The Financial Secretary personally presented the Supplementary Budget to Finance Committee at its meeting on 20th and 21st March, 2009.

The Revised Forecast Financial Results for 2008/9 presented to Finance Committee by the Financial Secretary on 20th March, 2009, stated among other things, that at the end of June, 2009 the Operating Deficit for the government would be $29.4M and that the closing Cash Balance would be $125.5M.

In his presentation to Finance Committee, the Financial Secretary told members, among other things, that:

I am saying all of that to say that the budget which the Government prepared and presented in April 2008, I believe, I am confident was a realistic budget. It reflected what the Government could do with the revenue expectations it had for this particular year, and indicated that the surplus expected for that year was approximately $14M ($13.8M).

We are now saying here today that for the year to June, the forecasting of that is not going to be possible, and we are actually going to have a deficit.

I can also say to the committee that in the course of presenting and compiling our latest forecast which is shown here reflecting a deficit position, I do not have a list of the dates of meetings held with me, but I can say that there were many meetings held with chief officers, chief financial officers, and we grilled and we grilled and we grilled the revenue expectations, the cost expectations, and these are, in the best of our efforts, realistic figures.

In summary, we believe that the revenue figures and the expenditure figures are as realistic as possible and they represent a long period of deliberations with chief officers and chief financial officers starting as early as October 2008.’

On 5th May, 2009 the Financial Secretary presented a Note to Cabinet to which he attached a Financial Report for the period from 1st July, 2008 to 31st March, 2009. In this report the Financial Secretary set out what he claimed was the actual financial position of the government as at the end of March, 2009. The Note stated that the net deficit for the 9 month period to 31st March 2009 was $18M and that the cash position or reserves of the government as at that date was $110M. The Financial Secretary also advised Cabinet that the projections on which the supplementary budget was based were holding true.

The Financial Secretary never advised my administration that there were any concerns about the deficit being substantially greater than had been projected during Finance Committee in March.

The Financial Secretary says that on 2nd June, one week after the new government was sworn in, he presented them with information which he never gave to my administration showing that over the course of the single month of April 2009 the actual deficit had risen by a whopping $20M from – $18.8M to $38M. To put this in perspective, the Financial Secretary is saying in his statement that although during the entire 9 month period from July to end of March the cumulative deficit was $18.8M, the deficit for the month of April alone was $20M. This defies belief. It is inconceivable and the Financial Secretary has not explained how this could happen. Instead, he seeks to divert attention from this issue by stating that this indicates that the $29M deficit projected in March was unrealistic.

I believe that that the above facts must cast real doubt on the veracity of the Financial Secretary’s statement of 1st July. They must also, regrettably, raise questions about the accuracy of the various predictions and projections made by the Financial Secretary regarding both revenue and expenditure. That is so not just in relation to those projections on which my administration relied, but also to the present projections on which the present government is currently relying. This is an extremely worrying state of affairs and one which must be addressed urgently for the sake of the country.

The present state of both the world and the local economy presented real challenges for my administration as it did and is still doing for governments around the world. Indeed, I should say that well before the meeting of Finance Committee in March 2009, my administration was keenly conscious of the challenges we were facing regarding the budget as a result of the global financial crisis and its impact and predicted impact on Cayman and particularly, on government revenues. That is why in October, 3 months into the fiscal year, in an effort to significantly reduce operational expenditure by government we met with the Chief Secretary, the Financial Secretary, his staff and all Chief Officers in the various ministries and portfolios in an effort to impress on the civil service the critical need to rein in operational expenditure. Following those discussions a policy directive was issued by me as Leader of Government Business and by the Chief Secretary as Head of the Civil Service to the civil service and all government owned companies, statutory authorities and agencies to:

Restrict the hiring of new staff and the filling of vacant posts to the absolute minimum required and

Reduce their approved operational expenditure by 6% over the course of the 2008/9 fiscal year.

These actions were taken on the initiative of the elected government. No actions were suggested by the Financial Secretary who in October 2008 predicted an operating deficit at the end of June, 2009 of $16M.

There are some critical facts which the Financial Secretary has conveniently chosen to ignore in his effort to pin responsibility for what he claims to be the financial position of the government entirely on the former elected ministers. Indeed, if he is to be believed, it is tempting to ask why we need a Financial Secretary at all.

The facts are these:

More than 50% of the operational expenditure of government goes to pay for the civil service; salaries, health care, pensions, etc. These costs are therefore not very flexible and will only decrease if the number of civil servants is reduced or salaries are cut. Conversely, these costs will increase if the civil service grows.

Under the present constitution elected ministers have no administrative authority and therefore cannot control decisions relating to the hiring of civil servants without the agreement and support of the Chief Secretary as Head of the Civil Service and the Chief Officers in the ministries and portfolios. That is why the Chief Secretary himself issued a directive to the Civil Service restricting further hiring.

Despite the provisions of the Public Management and Finance Law, the reality is that elected ministers have little control over operational expenditure which, in addition to the costs relating to the civil service, includes the purchase of supplies and services to keep the engine of government running. These decisions are by and large within the province of Chief Officers.

When the decision was taken in October, 2008 that operational expenditure had to be reduced it was important that this was implemented immediately, hence the reason it was effected by a process of directives to the civil service and a public announcement. If, as the Financial Secretary has suggested, we had waited and instead of issuing the directives had opted for the process of revising the budget provisions and calling a meeting of Finance Committee and of the House to reduce the overall budget, many weeks, indeed possibly as much as 2 months, would have elapsed before the decision would have had any effect. This is so because of the work that would have been required by the Portfolio of Finance and Economics and the time it would have taken for them to prepare a revised budget for a meeting of Finance Committee.

The Financial Secretary claims that he warned in October, 2008 that unless the matter was taken to the Legislative Assembly ‘there was a grave danger that without a cost-reduction Supplementary Budget exercise, {by Finance Committee} the promised reduction would be spent as time went by in the financial year‘. He puts this forward as one of the principal reasons why the operational expenditure was not significantly reduced as a result of the directives given by my administration. Quite frankly, this is nonsense. Is the Financial Secretary suggesting that merely reducing the budget appropriations through Finance Committee would have the effect of containing operational expenditure by the public service? If so, then how does he explain what occurred since the budget was reduced by Finance Committee on 21st March, 2008 and the position at 30 June, 2009 during which period he says a further $19M in unauthorized operational expenditure has been incurred by the civil service.

The new government, without question, has chosen to present the current financial difficulties of the government in the worst possible light in order to discredit my administration. That is not unusual. But what is unacceptable is that they appear to have found a willing ally in the Financial Secretary in carrying out this exercise. I suggest that the 1st July statement of the Financial Secretary raises more questions than it answers and that there remains much for the Financial Secretary to account for in relation to the advice and guidance which he gave to my administration over the past year.

I conclude by saying that it is critical that the government develops a better system of projecting both revenue and expenditure. I do believe that the advent of an elected minister with responsibility for finance under the new constitution will go a long way to introduce the level of accountability necessary to ensure good governance in a democracy.

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