UK: Cayman needs separate fund to pay debt

It hasn’t been widely reported, but one condition the Cayman Islands government must meet as part of its agreement with the United Kingdom to borrow money this year is the establishment of a ‘sinking fund’ – sometimes called a rainy day fund.

A sinking fund is basically a financing method that organisations use to set aside money to help retire – pay off – debt.

Strategic policy documents released by the government last month gave details of a medium-term plan to start paying off debt at a rate of some 
$34 million per year.

According to those records, Cayman will have amassed nearly $630 million in public sector debt by 30 June, 2011. By comparison, that’s about $115 million more than the country’s stated net worth.

UK Minister of State Jeremy Browne said on 1 December, in response to a parliamentary question, that in addition to refinancing debt and cutting costs, Britain was keen to see its overseas territory establish a dedicated bank account to help 
retire debt.

“The government gave permission for the Cayman Islands government to borrow CI$155 million subject to…government using the proceeds of divestment activity to establish a dedicated sinking fund within the next year to rebuild [cash] reserves and offset debt.”

Previously announced government plans have included earnings of some $47 million from the divestment of government assets, including the wastewater system, to private entities. What the UK seeks is essentially a guarantee that money will be set aside for a specific purpose.

Premier McKeeva Bush has already said that part of government’s cost-cutting plan will be not borrowing money to pay for new capital investment (construction) or operating expenses over the next three years. Mr. Bush has also said government will limit all spending on construction projects to $25 million a year for the next three years.

“The government recognises the significance of managing public debt in order to keep it at manageable and acceptable levels,” read the government’s strategic policy statement for 2011/12. “Instead, the government seeks to maximise operating surpluses and to pursue other initiatives for financing.”

A sinking fund generally helps reduce worries of creditors that an entity will default when a debt comes due. However, it can also cost bondholders money if interest rates drop and the entity is able to repurchase bonds at below-market prices.

The Cayman Islands government’s three year financial plan calls for government to go from a projected $31.9 million operating deficit in the current budget year to a $60 million operating surplus in 2013/14.

Cash balances are forecast to go from $84.4 million this year to nearly $112 million during that same time.

Audited accounts

Also under pressure to comply with UK directives are various Cayman Islands government ministries, portfolios, statutory authorities and government-owned companies that have been ordered by the UK to update their accounts.

Minister Browne has said that Cayman’s government needs to ensure “the Islands have a full, up-to-date set of audited accounts by the end of the next financial year”. Whether that refers to the current 2010/11 year or the 2011/12 government budget year wasn’t clear from Mr. Browne’s comments.

In any case, Cayman has not presented a full set of audited accounts and annual reports – as required in the law – since 2004. Successive auditors general have hounded government entities to turn in those financial statements and to provide additional information to complete the statements.

Early this week, auditors are expected to meet with the Public Accounts Committee to present a full report on the state of government accounts. Previously, Auditor General Alastair Swarbrick said he would present that report to lawmakers in mid-December whether or not any financial statements or annual reports had been completed.

Things did not look hopeful on that front, after most government agencies failed to report their financial statements for the previous 2009/10 budget year on time.

According to Mr. Swarbrick, six of 12 government ministries and portfolios did not submit their financial statements for the 09/10 fiscal year on 31 August, as required by law.

Only 10 of 25 statutory authorities and government-owned companies submitted their financial statements by the deadline, he said.

Some entities have financial reports due going back as far as 2003 or 2004, and in a few cases those agencies had to give up and not file any statements at all.

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2 COMMENTS

  1. $630 million in debt $30,000/citizen which is $115 million more than the countries net worth! This must be why it is called a "sinking fund" and another reason the economy sure feels like it is sinking.

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