Auditors: Government personnel costs ‘understated’ by millions

The Cayman Islands government spends about 68 percent of its annual budget on employee payroll, according to estimates compiled this week by the auditor general’s office.

However, those figures provided in the yearly public sector budgets for 2015 and 2016 are “understated” – according to auditors – and would likely be even higher if accurate costs related to pension and healthcare coverage for civil servants were included.

“The complete, relevant expenses for post-retirement healthcare and pension obligations have not been recognized within the financial statements for 2015 and 2016,” Auditor General Sue Winspear said. “As a result, personnel costs of $352 million in 2015 and $400 million in 2016 have been understated.”

Consequently, the government’s consolidated financial statements for the public sector in both years “are materially misstated,” leading auditors to issue an adverse opinion on the entire public sector’s financial statements in both 2015 and 2016. That opinion means the figures provided in the government’s financial records cannot be relied upon.

Precisely how much more added pension and healthcare liabilities are costing the government each year was not specifically stated in the audit report, but some of the totals can be gleaned from documents previously released by government. They come to a one-year estimated total of an additional $157 million for the 2015/16 budget year.

A valuation completed in September 2016 estimated Cayman’s total post-retirement healthcare obligation at $1.7 billion as of June 30, 2016. That is the present-value figure that Cayman’s government expects to pay out for healthcare coverage over the next 20 years. It is not due all at once.

However, a pre-election finance report filed in early 2017 noted a “current value” for the post-retirement healthcare costs.

“The post-retirement medical expense total[ed] $141 million for the year ended June 30, 2016,” the report stated.

The government’s pre-election economic and financial update also noted the following: “For all intents and purposes, the government is on a ‘pay-as-you-go’ plan in respect of post-retirement healthcare liabilities. Currently, no long-term assets have been established to start offsetting the government’s post-retirement healthcare liability.”

Meanwhile, the Cayman Islands government was advised to pay an additional $16 million a year for a 20-year period – starting in 2016 – to help settle funding deficiencies in its main civil service pension plan.

The total bill for the period would be $320 million, according to financial advisers’ estimates in a report on the Public Service Pensions plan obtained by the Cayman Compass under the Freedom of Information Law.

The recommended $16 million per year contribution by government would be in excess of normal annual pension contributions made on behalf of employees during the period and would therefore not be included in the budget as a payroll expense.

Liabilities

Certain changes to lessen the blow of healthcare costs over the next 20 years have already been made by the government, including increasing the retirement age for civil servants to 65.

Another major change being discussed is a requirement that civil servants contribute a portion of their salaries to monthly healthcare premiums. However, the Cayman Islands Civil Service Association recently noted that its membership has not agreed to any such co-payment without choice in healthcare providers being offered to plan participants.

Retired civil servants and active government workers are not required to make co-payments. Their monthly premiums are paid by government.

The Cayman Islands government is obligated to provide civil service retirees, veterans and seamen a certain level of healthcare benefits during their later years when they are no longer working. The liability figure represents what government is expected to pay over a specified period for these healthcare services, which include, to some extent, payments to current civil servants whose retirement is expected during the period.

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