RAW: This State’s Finances – The Real Rann Legacy = State Bank 2.0 – Part 2


[In this is the second of our three part Special Kryztoff Investigation into the condition of this State’s Finances in the wake of the Rann / Foley Years, we look at the real state of this State Debts.]

For Part 1 – see www.kryztoff.com/RAW/?p=4218

Debt Balloons

Perhaps we can’t believe this Government when it talks fiscal restraint when it comes to savings, so what about managing state debts and that thing the ‘non financial public sector net financial liabilities ratio’ that Owen and S&P referred to?

The net financial liabilities of the non-financial public sector are basically the net debts of the whole of the State Government, not just within Government departments but also government agencies (such as SA Water.)

The two biggest elements of these whole-of -government net financial liabilities (NFL) are the government’s own debt and the unfunded superannuation liabilities that have arisen from a disastrous superannuation scheme that benefitted public servants of days gone by.

When the Rann Government was elected, the State’s NFL stood at $9 billion with government debt at $3.3 billion and the unfunded super at $4 billion. In the eight years before, in which the Liberals held power, they had managed to reduce that government debt by over $8 billion after the State Bank debacle of the previous Labor Government.

As at June 2011, the NFL had increased to $18.3 billion, more than double the level at the time of this government took office. (On top of this, it is believed, is the unfunded portion of Workcover at a further $900 million which was basically zero when Labor came to power.)

Of this, the State debt has increased from $3.3 billion to now $6.9 billion and the unfunded superannuation has increased from $4 billion to $8.7 billion, that is, both have more than doubled.

But the reality is that the worst of this blowout has occurred with and since the Global Financial Crisis. At 30 June 2008, just as the crisis was taking hold and the losses were being incurred, NFL stood at $10.2 billion, with debt at $1.6 billion and unfunded super at $6.5 billion. That is, in the three years since, debt has ballooned by $5.2b (more than three times the pre-GFC level) and the unfunded super liability is up $2.3 billion (about 35%).

It is in this period that the government has lost complete control of its financial situation. In its first six years, the Rann government had racked up aggregate cash surpluses of $1.9 billion – funds that could be used to fund infrastructure and/or retire debt. However, in these past three years, it has recorded losses of all these gains and a further $1.8 billion, and still kept on a capital works program of $2 billion-plus per year.

So, as we sit now, the ratio of NFL to the whole of Government revenues is around 114%, up from 73% prior to the GFC, well outside S&P’s band of 80-90%, and with no prospect of getting back into that band in the immediate future.

To get back today to 90% (the upper end of the range), the Government needs to either reduce state debts or increase revenues (or some combination of both) by $3.8 billion. This gap rises to near on $4.4 billion in 2013/14 before, on the back of some suspect revenue numbers to $3.2 billion in 2015. Given the only revenue lever that is really at the Government’s disposal is state taxation, the current gap of $3.8 billion actually equates to an entire year’s revenue or 20% of all revenues.

Yep, the AAA rating can be kissed good bye and we now need to assess just how much a down grading of the State’s credit rating we will be facing.

How Did We Get Into This Mess?

But just how did the GFC affect the State Government’s finances so badly, given unemployment has remained relatively high, property prices have remained steady and the Federal Government kept up its supply of grant money? (Let’s not forget all that stimulus money that has built school halls and the like all came directly from the Federal Government and not the State.)

One benign explanation for the Government’s predicament is that the unfunded superannuation is calculated on assessment of total future cash payments discounted back to today by a risk-free discount rate. That means as this discount rate decreases, so the present value of the amount to be paid into the future increases. So, as interest rates came down in the wake of the GFC, so notionally this problem became worse. This is the basis that has kept S&P silent these past couple of years until now.

However, what is not so benign is the fact that the unfunded superannuation scheme lost around $2 billion during the two years of the GFC. Of this around $500m cannot be explained by movements in the markets. A review of the accounts of State Superannuation leads one to the belief that State Super invested in fairly exotic instruments that spread its performance risk to far flung parts of the world, adopting an investment strategy that appears somewhat aggressive for the nature of the fund.

Perhaps S&P should have undertaken rather more analysis earlier of the mess that is State Super since June 2009, instead of relying on State Government assurances about where those liabilities were heading.

The fact is now that due to the GFC and its own mismanagement, the Government must now pump in more money each year (around $400 million per year) to have any hope of meeting its goal of extinguishing these unfunded liabilities by 2034 (as it has and continues to promise.) This is because the structure of that fund is now such that average returns will only ever produce break-even results, and the required $16 billion in gross future payments have to come from general state revenues.

Given Treasury has been dictating investment strategy to all its investment agencies for the past few years (State Super, Motor Accident Commission etc.), no one other than the boffins who projected benign growth in revenues and expenditures in the Budgets is responsible for these losses.  Those boffins ought to be asked to explain just where the missing $500m has gone.

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  1. […] For Part 2 – see Part 2 – Debt Balloons […]

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