The United Kingdom has let up just a bit on its timeline for the Cayman Islands to come back within legal debt limits.
According to a finalised Framework for Fiscal Responsibility document, which Premier McKeeva Bush signed last week in London, the UK deadline for Cayman’s government to comply with debt limits will occur at the end of the 2015/2016 budget year – meaning 30 June, 2016.
The previous agreement would have required Cayman to achieve those debt limits, as well as amass liquid assets of 25 per cent of government’s total operating expenses, by the beginning of the 2015/16 budget year; that’s 1 July, 2015.
The government is out of compliance in three of the six areas measuring responsible financial management. In short, Cayman is paying too much each year to service its debts, its overall debts are too large compared with government revenues, and it does not have enough cash reserves to comply with legal requirements.
Government financial records show Cayman almost reached the legal requirement for cash reserves in its current budget, having 87 days worth rather than the required 90 days.
Cayman’s “net debt” – the government’s total debts as compared with revenues – was estimated at 108 per cent for the current 2011/12 budget year. According to the Public Management and Finance Law, the Cayman Islands should maintain a “net debt” ratio of 80 per cent when compared with its revenues.
Government estimates show the Cayman Islands’ total public sector debt will remain well above $500 million by mid-2014, despite payments of more than $30 million per year until then.
In the final framework agreement, the UK also eased up slightly on procurement and analysis requirements for public projects above a certain lifetime value. The previous value figure of $5 million was doubled to $10 million, so that any projects with that lifetime value would be required to be evaluated for performance, published in the government’s annual Strategic Policy Statement and require Cayman to retain independent financial and legal advice.
The government’s Strategic Policy Statement for the 2012/13 budget year is expected to be delivered to the Legislative Assembly by Premier Bush on Thursday.
The finalised framework agreement requires the Cayman Islands to borrow to fund capital [construction] projects only if the proposed project will earn enough to pay off financing costs. However, a separate section was added from the initial framework agreement allowing Cayman some wiggle room, if it has enough cash in the bank.
The final wording of the agreement reads, “Unless in exceptional circumstances different arrangements are agreed in writing by the Cayman Islands government and the [UK] secretary of state, the Cayman Islands government will borrow only to fund capital expenditure where; the proposed project is forecast to yield sufficient revenues to fund the additional debt service costs, or the government can demonstrate that it has sufficient operating cash flows to fund the additional debt service costs which arise from borrowing to finance such capital expenditure.”
Cayman was also given a bit of a break in the timeline during which it must present its draft budget to the United Kingdom’s Foreign and Commonwealth Office. The initial framework agreement asked the draft budget to be sent to the UK “no less than five weeks” before its presentation to the Legislative Assembly. The final deal requires that to occur within three weeks of the presentation.
China Harbour deal delayed
One immediate effect of the Framework for Fiscal Responsibility will be to push back the November deadline for a potential agreement to construct port berthing facilities in George Town between government and China Harbour Engineering.
A statement released from Premier Bush’s office Monday noted there had been an agreement to formulate a business case and a value-for-money assessment for the development of the George Town cruise port project. Mr. Bush said the Port Authority contracted the KPMG accounting firm in August to request them to carry out such a review.
“The work being done by [the Port Authority] through KPMG is detailed and complex,” the Premier’s statement read. “Because it should be completed prior to the signing of a framework agreement, the current [Memorandum of Understanding with China Harbour] will be extended beyond its expiry date of 30 November.”
The date was pushed back to 31 March, 2012, according to Mr. Bush.