At the hearing of the Standing Public Accounts Committee (PAC) held on March 14, 2024, Kenneth Jefferson, the Financial Secretary for the Cayman Islands, confirmed that over two billion dollars attributed to an actuarial valuation of post-retirement health care net liability is not reflected in the Statement of Financial Position for Central Government and the Entire Public Sector for the financial year ended December 31, 2020. Recording this properly would obliterate the current favourable financial statement position for net assets and convert reported surpluses into losses, possibly exceeding $100 million.
When asked to explain the rationale for the failure to reflect the $2.4 billion post-retirement healthcare net liability on the Statement of Financial Position, the Financial Secretary said:
… the framework for fiscal responsibility, one of the ratios there is net assets of the Government.
Its assets, less its liabilities, has to be positive.
Placing the post retirement healthcare liability figure of two plus billion dollars on the face of the balance sheet would essentially take the government’s current net assets of around the same amount, two billion, would take that to zero.
He added:
So, any Government automatically begins to perhaps panic and say, placing the liability on the balance sheet, is that going to take my net assets figure down to zero?
Am I at risk of not complying with that particular ratio?
And therefore, that creates a bit of fair and a bit of reluctance to actually go ahead and do so.
So that’s one major consideration in not just the current Government’s thought process, but previous Governments as well.
This failure to properly reflect the amount in the Statement of Financial Position is partially what led to the auditor general issuing an “adverse opinion” on the Government’s financial statements.
The audit opinion explained:
Government did not record its liabilities relating to its post-retirement healthcare program.
The results of the health care liability actuarial valuation for Core government estimated the post-retirement health care net liability to be $2.4 billion, post-retirement medical expenses totaling $148.4 million and other comprehensive income of $34.9 million as at 31December 2020.
To make matters worse, the Financial Secretary confirmed that, if recorded properly, this would also impact the reported surplus.
He explained:
It’s also the case that the measurement of the post retirement health care benefits impacts the surplus in any one particular year as well.
And I think in this current report, the Auditor General might make reference to an annual impact, the most recent one of the region of $150,000,000, as additional costs to hit the financial statements of government.
He continued:
So in past years, we’ve actually had surpluses in the region of $100 million and more recent times, we’ve had much, much smaller surpluses.
And, Mr. Chairman, for the year ended 2023, the operational surplus of the government, subject to audit, of course, is in the region of $30 million.
He concluded:
So, if you also account not just for the liability figure, but for the cost of post-retirement benefits to be earned in the future, if you were to account for those costs in a current year, you’re looking at an additional cost of well over $100 million sufficiently large to take away your present surplus and turn it into a loss.
The Financial Secretary appeared to rationalise the decision by the current and previous Governments to not reflect these amounts on the Statement of Financial Position and Statement of Financial Performance by saying that “it is quite fairly difficult for a government to take the decision to put this matter fairly and squarely on the face of its primary financial statements because of the fear of there being non-compliance with at least two of the FFR ratios and the consequences of that they simply don’t want to deal with.”
He indicated that the appropriate time for a Government to decide to report the post-retirement health care liability in the Statement of Financial Position would be at the start of that Government’s term.
He added that such a change to financial reporting is not likely to take place right now because “There are other considerations in mind right now.”
Responding to the Financial Secretary, Sue Winspear, the Auditor General, said:
I think I appreciate very much the dilemma and the difficulty, but [there are] a couple of comments to make that spring to mind from what the FS has just said.
Firstly, that the fiscal framework, whether it’s actually declared in the balance sheet or financial statements or not, it is part of the fiscal framework.
So, if the fiscal framework is broken, the fact that it’s not divulged doesn’t mean that it’s not an issue for the fiscal framework, because it is a liability.
And that’s the point.
It’s a liability that’s not been disclosed.
She added:
And the other comment I’d make is just drawing it back to the earlier questioning around section 47 (3) of the Public Authorities Act.
Because if all the statutory authorities end up with the same health care and pension benefits as the civil service, it will just increase the amount and the deficit will get bigger and bigger and bigger.
So, I think there’s a really big policy decision that this Government, the future Government, some Government at some point will need to face, but not disclosing it doesn’t make it go away.
To better appreciate the point made by the Auditor General, members of the public should note that the Framework for Fiscal Responsibility provides the directives and guidelines for prudent fiscal management by the Cayman Islands Government. It is an agreement between the Governments of the Cayman Islands and the United Kingdom.
According to the Public Management and Finance Act, “The Government shall comply with the principles outlined in the Framework to ensure effective medium-term planning, obtain value for money, effectively manage risk and deliver improved accountability.”
The Public Management and Finance Act added: “Where an interpretation dispute arises between the provisions of the Framework and those of the remainder of this Law, the former shall have precedence over the latter.”
If the UK were to deem the non-recording of the $2.5 billion post-retirement health care benefit liability on the Statement of Financial Position to be in non-compliance with the Framework, The Public Management and Finance Act states that “the Cayman Islands Government will present, for the approval of the Secretary of State, a plan that is consistent with the SPS to remedy the breach.”
“The maximum period which may be permitted to rectify a breach is three fiscal years from the point at which the breach occurred or, in exceptional circumstances, such other period that may be agreed in writing between the Cayman Islands Government and the Secretary of State,” The Public Management and Finance Act stated further.
In a likely acknowledgement of the implications of a possible breach interpretation, Roy McTaggart, the Chairman of the Public Accounts Committee, queried whether “the UK ever raised this as an issue with the Ministry of Finance or with the Government.”
The Financial Secretary explained the situation as follows:
So, Mr. Chairman, just to say that in terms of disclosure, the Auditor general is right, it’s not disclosed on the balance sheet of the Government, but certainly it is a part of our notes to the financial statement.
So, the disclosure is in notes as opposed to on the face.
So, disclosure does exist.
He added:
Mr. Chairman, the answer to your question is given that those financial statements are available to the UK and we’ve stated a surplus on the face of those financial statements, which could be whittled away and turned into a deficit if you take into account full cost.
I’ve never had the UK government question it and say to us, you have a loss situation here and not a surplus.
Your net assets are zero or negative and not two plus billion positive.
I’ve never had that feedback from the UK.
These exchanges between the Financial Secretary and the Auditor General demonstrate the importance of members of the public in the Cayman Islands paying attention to the Government’s published financial statements and accounting methods used to record items. Once the public is educated on these matters, they will be in a better position to hold the Government accountable and encourage greater transparency.
As it stands, it would appear that if the $2.5 billion post-retirement health care benefit liability was properly recorded on the Statement of Financial Position (and not just in the notes to the financials) and if the measurement of the post-retirement health care benefits was recorded in the Statement of Financial Performance, Government’s net assets would be zero and hundreds of millions of dollars in deficits would be reported rather than surpluses.
