Out of control

A consultant’s report indicates Cayman’s elected officials have lost ‘effective control’ of the public purse. Over the next two weeks  Brent Fuller looks at the main recommendations made in the Miller report.

In November 2005, then-opposition party member Rolston Anglin warned the Cayman Islands Legislative Assembly about the burgeoning expenses of running the country’s government service.

“I have a great concern for where we are going in the next five to ten years,” Mr. Anglin said. “The now Minister of Education spoke about the fact that the civil service and the cost of the civil service was strangling the financial resources of the country.”

Fast forward a little less than five years and it seems Mr. Anglin’s words spoken at the time proved to be prophetic.

According to budget figures compiled in a recently released consultant’s report, Cayman Islands government personnel costs increased more than 54 per cent between the 2004/05 budget year and the 2008/09 budget year.

The consultant’s review – dubbed the Miller Commission report – noted that the number of civil servants working in central government between mid-2003 and mid-2008 grew by 26 per cent.

The report noted there were more than 6,000 people currently working in government agencies; that’s more than 15 per cent of the Cayman Islands total workforce.

“Clearly, these figures for personnel cost increases are considerable and difficult for a junior or middle-grade civil servant to comprehend when seeking a pay increase,” wrote consultant James Miller III in his report. “Nevertheless…government employees have received additions in pay and benefits not shared by the economy as a whole and definitely not affordable.”

The Miller report revealed that senior leadership in the Cayman Islands government received even higher pay hikes than other government workers due to “recognition of the weightier responsibilities and prestige of the position”.

“We note that the issue of affordability was not given as a consideration in determining the increases (which ranged between 10 and 19 per cent),” the report stated.

Finally, the review noted that some $1.5 billion in Cayman Islands government operating expenditures over the last five or six years has not yet been audited, and therefore not accounted for or reported to the Legislative Assembly.

“As a result, I believe that the Legislative Assembly has lost effective control of the public purse,” Mr. Miller wrote.

Efforts to regain control are now under way within local government, as well as in London where the UK’s Foreign and Commonwealth Office is reviewing the budget to be placed before the Legislative Assembly on 30 April.

The Cayman Islands Civil Service Association is concerned that its members will be made “scapegoats” for the current economic crisis the country is facing. Indeed, Deputy Governor Donovan Ebanks wrote in a recent memo to civil service department heads that salary cuts, health care premium payments and even job losses might be needed to balance the budget.

However, civil servants believe the possibility of enacting new revenue measures – taxes and fees – to support government operations was given scant consideration in the Miller Commission report. 

The Civil Service Association’s Management Council opined that the Miller Commission, which also included UK conservative politician David Shaw and Cayman Islands Financial Secretary Kenneth Jefferson, didn’t actually accomplish what it was supposed to.

“It is clear that their pre-existing political and economic views coloured the report and its recommendations,” the management council statement read.

The civil service association noted that the report provided little in the way of recommendations for new revenue measures that might be used by the Cayman Islands government to get itself out of the current financial mess.

“These practical suggestions were what was called for when the commission was asked to ‘make recommendations…for improving the current revenue base…for the Cayman Islands.’”

In one instance, civil service association members did agree with the independent commission’s comments that public sector reform initiatives implemented several years ago in the Cayman Islands had not been effective.

The management council indicated these reforms were responsible for an increase in the number of government workers, particularly an increase in management positions. The council also stated that the current financial system requires government to “double-bill” itself for services rendered to different government departments.
“Civil servants not only welcome oversight and audits of our operations, we are active participants,” the management council stated. “Nevertheless, we are somewhat concerned regarding the approach, methodologies and recommendations of the Miller Report, as well as the long-term implications to our island community.”

Get costs down
Aside from salary increases given to civil servants over the past several years, the Miller Commission report highlighted two areas in particular where government should reduce costs: pensions and health care.

Combined liabilities of well more than US $1 billion have amassed in Cayman’s public sector pension and health care systems, according to the report.

“A liability has been incurred which future generations will increasingly have to meet in cash terms for which an inadequate provision has been made,” the Miller report stated.

The unfunded liability for the three Public Service Pension plans administered by the Public Service Pensions Board was estimated at nearly US $325 million last year.

That is not an amount which comes due immediately, but rather operates on a rolling 20-year period based on how many people are participating in the pension plans and what estimated benefits will have to be paid out over that time. The unfunded liability portion of the pension plan only applies to those civil servants in the defined benefit part of the plan – those who will receive monthly pension checks when they retire.

However, according to figures from the Public Service Pensions Board total pension plan assets were estimated at US $295 – well below the unfunded liability amount.

According to the Miller report, cash payments to support annual benefits in the pension system were due to increase from CI $20 million this year, to CI $50 million in 2020, to CI $100 million in 2040.

That $100 million figure would be approximately 43 per cent of the civil service’s current annual payroll.

The report writers were also concerned that government retirees to date have been relatively few in number, and have caused pension costs to increase relatively slowly.

According to the Public Service Pensions Board figures, there are a total of 8,341 people in the three pension plans administered by government, including the Parliamentary Pensions Plan and the Judiciary Pensions plan. Just 1,239 of those are currently pensioners.

Roughly half of those in the pension system – about 4,200 workers – are participants in the defined contribution pension plan; which means they will receive a lump sum pay out upon retirement and do not add to the system’s current unfunded liability.

“As no current audited financial statements are available, we are unable to comment on the ability to meet future payments other than to say that it appears the government will have to provide substantial and increasing funds if it wishes to support past pension expectations,” the Miller report read.

“This increasing annual cost would have an impact on limiting the government’s capacity to spend money on new policy initiatives…or it would require a continuing substantial increase in revenues from new taxes, duties, fees or asset sales.

The report recommended that benefits accrued to those civil servants still in the defined benefit portion of the pension plans should be revised to “reflect their average lifetime earnings”. Right now, defined benefit plan enrolees receive two-thirds of their final salary in pension payments. So a civil service employee who finished their career making $60,000 a year would receive $40,000 a year in retirement.
Civil servants have utterly rejected any proposals to reduce or postpone payments into their retirement plans. In fact, Deputy Governor Ebanks said any such plans had been taken off the table in the upcoming budget year.

“The (civil service) association…cannot support nor recommend that the Cayman Islands government engage in any illegal acts,” association members stated last month. “We believe that any attempt to change the terms and conditions of government employee contracts without agreement by each individual employee could expose the government to large and severe liability.”

“We do not believe that a pension suspension would be legal,” the association added.

A one-year break in pension payments to civil servants on the defined contribution plan would cause that fund to liquidate in 33 years, according to the civil service association.

“This means that all remaining benefits from the defined benefit plan would have to be paid out of future recurrent expenditure,” the association stated. “(This) increases the onus on future generations to fund the benefits of the current generation.”

As for the “current generation”, actuarial studies have shown that current contribution rates to the pension fund are not sufficient to provide adequate retirement benefits. A pension suspension would simply make the problem worse, in the civil service association’s view.

Health care benefits
The Miller Commission report noted that a 2004 valuation of post-retirement health care benefits for retired and current civil servants, as well as those no longer working in the Cayman Islands, indicated the accrued liability for those payments had reached US $798 million.

That liability figure is today expected to be greater than US $1 billion.

However, the independent report did not vouch for the accuracy of any recent estimates on health care liabilities.

“An up-to-date legal opinion and actuarial report should be published immediately,” the Miller report stated.

Currently, the government pays for 100 per cent of all civil servants health care premium costs.
“Benefits under the program should be reduced to affordable levels, with some (co-payment) contributions required for treatments,” the Miller Commission report read. 

Civil servants have indicated that they would be willing to start paying for health care premiums. But they want something in exchange for those payments.

According to government estimates, health care premiums could cost anywhere from $179 per month for single employees to $536 for civil servants with families.

“Civil servants have expressed…that they would support exploration of co-pay options if, and only if, those options include the ability to choose health care providers and if the cost is comparable to those experienced in the private sector,” the civil service association stated.

Also, civil servants indicated that government should ensure health insurance premiums were not being artificially inflated to subsidise care for patients deemed “uncoverable” by private sector providers.