Budget rules consistently bent for years

Successive governments may have misused budget measures meant for emergencies to push through spending or re-assign funding without proper scrutiny from MPs, according to an analysis by Auditor General Sue Winspear.

The last government used the Section 11.5 provision – designed for exceptional circumstances under the Public Finance and Management Act – 16 times in the 2018-19 legislative year. Only one of those was properly justified as “exceptional”, according to the auditor general’s analysis back in 2020.

It’s a point she raised in her report focussed on the budgeting system, ‘Improving Financial Accountability and Transparency: Budgeting’, published in December 2020.

The issue has once again come to light with the leak of her report looking into the previous administration’s decision to redirect $5 million from government’s coffers to fund new international offices and Cayman’s participation in the Dubai Expo, which Winspear highlighted as particularly concerning.

In that report, which is yet to be finalised with a government response, she questioned the legality of that decision, and suggested the timing – on the eve of a general election – was especially problematic, tying a new government to a spending plan that had not been endorsed by the House.

Emergency spending or bad budgeting?

More generally, Winspear says she is concerned about the use of the “exceptional circumstances” provision, which is designed, in her view, for emergencies only.

Speaking to the Compass recently, she expressed concern about the use of the section, which, in essence, appears to have become a loophole to tinker with the government budget and authorise new spending without having to go back to the House for approval.

“This has been something I have been concerned about for some time. My office has looked at this several times and most recently through a performance audit report we published in 2020, and as an issue that arose specifically regarding the funding of overseas offices and the Dubai Expo costs,” she said.

On very few occasions are the circumstances actually exceptional, Winspear said in her 2020 report.

“We found that our review of things being put forward as requiring exceptional funding for the most part did not meet our interpretation of ‘exceptional’ according to the Public Management and Finance Act,” Winspear said.

She explained that for the performance audit, her office based this on “our commonsense interpretation”.

We found that our review of things being put forward as requiring exceptional funding for the most part did not meet our interpretation of ‘exceptional’ according to the Public Management and Finance Act.” – Sue Winspear, Auditor General

However, Winspear said, for the report on the overseas offices and expo, “I actually supplemented my analysis with a legal opinion that supported the view that this was not ‘exceptional’”.

Winspear said her report highlights a general concern that the mechanism, provided for under Section 11.5 of the Public Finance and Management Act, has been misused by various governments since 2003.

“We are working on a trilogy of performance audit reports on the financial regime in government, entitled ‘Improving Financial Accountability and Transparency’, and the first of those on the budgeting system was published in December 2020,” she said in her response to the Compass.

The new PACT government has continued the trend of using the provision, according to data obtained by the Compass following an open records request.

The current administration has made approximately 101 changes to the 2021 budget, redirecting funds for projects like school lunches, education scholarships, pay increases for the University College of the Cayman Islands board of governors, and post office running costs.

Other emergency expenditures, shown in the FOI documents, such as funding for rapid COVID tests and to support people whose employment has been impacted by the pandemic, do appear to fit the criteria of ‘exceptional’.

For the first three months of the 2021 financial year, 32 transactions were made by the Progressives-led administration.

Though the Progressives’ transactions came in at $36.89 million in April, most expenditures covered shortfalls in financial relief/training programmes, Cayman Islands Regiment funding, and the bump in constituency allowances and MPs’ salaries that went into effect.

Of that figure, $4.9m was recovered through unspent funding in other areas of the originally-approved budget, leaving an excess expenditure of $31.96 million.

In some cases, the principle of ‘use it or lose it’ spending came into play, when excess approved funding or unspent money from one ministry or programme is shuffled around internally to fill gaps or shortfalls in other areas.

Winspear, in her performance audit report on the budgeting process, recommended that government should ensure that all exceptional circumstance approvals by Cabinet “clearly satisfy the [PMFA] definition”.

In its management response, government said that in December 2016, the Ministry of Finance proposed legislative changes to the “definition of exceptional circumstances to ensure it could only be used for truly exceptional circumstances. However, these changes were not approved.”

Government, in the 2020 report, said it would have been raised with the budget and reporting working group to determine the best approach to address this recommendation, with March 2023 given as a planned date of implementation for this change.

Process envisioned vs process utilised

While each transaction by governments old and new can be argued to be legitimate expenditures given the need at the time, the question is: does it meet the legal requirement?

Exceptional circumstance, under the PMFA, is defined as an event which occurs during a financial year and which:
(a) is beyond the control of the Cabinet

(b) could not have been reasonably anticipated at the time of enactment of the Appropriation Law for that financial year;

(c) has an economic or social impact that is significant enough to necessitate executive financial transactions different from those planned for that financial year.

It can also be quantified as requiring the executive financial transactions to be entered into a timescale that makes compliance with the procedure established by Section 12 (Finance Committee approval through a supplemental appropriation bill) impractical.

There is cap on the expenditures allowed through this provision.

The Ministry of Finance pointed out, in response to Compass queries, that Cabinet may approve up to 5% of budgeted executive revenue as supplementary funding in each financial year.

For the entire 2020 financial year, the ministry said, 90% of the 5% budgeted executive revenue or a net $37.2 million in supplementary expenditure, via Section 11(5) of the Act, was appropriated.

The budgeted ‘executive revenue’ for the year was $826 million, with the 5% limit of $41.3 million.

As for the entire 2021 financial year, a net of $37.1 million in supplementary expenditure, via Section 11(5) of the Act, was also approved.

This represents 87% of the 5% budgeted executive revenue of $850 million. The 5% limit came to $42.5 million.

Even though these transactions are made and approved through Cabinet, they are subsequently reported to Parliament as a measure of transparency.

However, by utilising this process, it removes the ability of Finance Committee, which comprises all members of Parliament, to scrutinise the expenditure or the projects being funded.

Part of the issue that prompted the need for the use of such executive transactions is under-budgeting in certain areas, forcing the realignment or introduction of new expenditures.

One such area Winspear pointed to in her budget process performance audit was the tertiary healthcare services for indigents, seamen and veterans, which government pays.

She reported that over the five years from 2014-15 to 2019, those expenditures had been “significantly under-estimated annually”.

“This has resulted in the approval of supplementary budgets each year that were significantly more than the original budget; ranging from 49.1 per cent to 1,773.3 per cent more,” she pointed out.

Other circumstances that also eventually lead to supplementary funding are the lack of proper budgeting for capital projects and “ineffective planning or instances in which estimates could have been made better.”

In addition, Winspear expressed concern over the length of time between the transactions and reporting them to Parliament.

Ideally, reporting should follow the transaction, but with no set meetings of the House the supplementary appropriations are often reported months after they have happened.