The Cayman Islands will receive permission to pay off $8 million to $12 million of its national debt ahead of schedule if changes proposed to the government’s financial management law are approved next month.
The British territory found itself in the somewhat unusual position of having excess cash on hand but unable to legally spend some of it to retire debt amassed over the past decade.
The Public Management and Finance Law currently penalizes the administration for paying more than 10 percent of its core revenues in any given year toward debt. If that occurs under the present regime, the U.K. could be placed back in direct control of Cayman’s government finances.
Cayman regained control of its annual budget this year. Since 2010, it has had to present the budget to the U.K. foreign office each year before approval in the Legislative Assembly.
Under amendments to the finance law, set to go before the assembly in January, the government would be allowed to exceed the 10 percent of core revenues figure where repayments of debt principal “were not legally required to be made.”
Finance Minister Marco Archer said last month that following cash surpluses generated in the last three government budget years, it appears Cayman may be able to pay between $8 million to $12 million in additional debt before it becomes due. These amounts are mainly “historical debts” amassed by separately operating statutory authorities and government-owned companies that accrue interest every year at a far greater rate than government’s cash accounts earn interest, Mr. Archer said.
“We’re earning about 1 percent interest on our money, but the interest on the debt is accruing at 4 to 5 percent each year,” Mr. Archer said. “It doesn’t take a genius to figure out that’s not helping the country.”
Mr. Archer said Wednesday that he was uncertain when the additional debt would be paid, but that it would have to occur before December 2017 – the end of the current budget cycle.
The $8 million to $12 million represents a small portion of the $500 million Cayman’s central government owes in various loans and bonds. The lion’s share of the remaining amount – a US$312 million “bullet bond” debt – is looming in November 2019.
A bullet bond, often referred to as a balloon payment or a bullet loan, is one in which the entire amount comes due all at once. In the case of this particular loan, that would be Nov. 19, 2019.
Mr. Archer has said the debt repayment could be made all at once if the economy and government finances continue to improve significantly. Presumably, the government would have the option to refinance a portion of the debt if it could not be paid by the due date.
The Cayman Islands faces other significant debts in its government pension and healthcare systems, totaling an estimated $1.4 billion over a rolling 20-year period, according to an auditor general’s review last year.
The government has recently taken steps to address both issues.
Mr. Archer announced in June, and the Cabinet more recently accepted, proposals to put $16 million per year into the public sector employees’ retirement fund run by the Public Service Pensions Board. This additional payment made by government, beyond what it normally would pay for civil service retirees’ pensions, will help prop up the system that – at last review – had an unfunded liability of between $166 million and $266 million.
The liability, attributed entirely to the civil service defined benefit retirement system, could have caused the entire plan to collapse by 2024 if not addressed, according to government’s financial advisers.
Meanwhile, government has estimated a $1.18 billion liability over the next 20 years associated with its healthcare coverage plan for retirees.
Some changes to address that funding deficiency, including raising the government retirement age to 65, have been made. Also, Mr. Archer has said civil servants will have to start paying a portion of their healthcare premiums starting in 2018.