Heavy-lifting needed to fix Cayman’s finance problems

The United Kingdom’s recently-published Framework for Fiscal Responsibility document – signed 23 November by Cayman Islands Premier McKeeva Bush – will require Cayman to meet debt limits set out in the country’s law by the government’s 2015/16 budget year. The Journal’s Brent Fuller reviews what the new three-year plan means for Cayman. 

In terms of government budgets, the 2015/16 deadline set by the UK for Cayman to essentially recover financially isn’t very much time; particularly when considering the problems the country must confront to bring it back into compliance with the law.  

According to Cayman’s current spending plan, the government is out compliance in three of the six areas that measure responsible financial management. In short, Cayman is paying too much each year to service its debts, its overall debts are too large compared to government revenues, and it does not have enough cash reserves to comply with legal requirements.  

Government financial records show that Cayman almost reached the legal requirement for cash reserves in the current budget, having 87 days worth rather than the required 90 days.  

However, it is somewhat further from meeting legally required limits for paying off debt and for overall debt limits as compared to revenue.  

According to budget records, Cayman’s “net debt” – the government’s total debts as compared to revenues – was estimated at 108 per cent for the current 2011/12 budget year. According to the Public Management and Finance Law, the Cayman Islands should maintain a “net debt” ratio of 80 per cent when compared to its revenues.  

Government estimates show the Cayman Islands’ total public sector debt will remain well above $500 million by mid-2014, despite payments of more than $30 million per year until then.  

During his budget address this summer, Premier McKeeva Bush stated that, as of 30 June, Cayman’s public sector debt was expected to reach nearly $626 million (approximately US$726 million).  

The country’s net worth was expected to be $485.6 million at that same time. By the end of the current budget year on 30 June, 2012, Premier Bush said public sector debt should have dropped to $599.3 million. 

The government has projected operating revenues at $535.8 million for the 2011/12 budget year. If that figure is achieved, public sector debt will still be well above the 100 per cent “net debt” level.  

The second serious problem area, debt servicing, will see government paying more than $33.4 million to pay off central government debts in the current year, making its debt service payments 11.2 per cent of core government revenues. That figure is supposed to come in at 10 per cent, according to the law.  

Cayman is already beholden to pay between $30 million and $40 million in each of the next two budget years just to pay off its debt. Even with these large sums, Cayman’s public sector debt will remain large – nearly $550 million by mid-2014, according to Mr. Bush.  

“For me, that is still too slow a progress,” he said back in June.  


Goals ‘challenging’  

The overall situation will make it “challenging to achieve” the 2015/2016 deadline set by the United Kingdom to comply with debt limits, according to a former external consultant to the Ministry of Finance.  

Paul Byles, the managing director of Focus Consulting, worked as a ministry consultant for more than a year and assisted with the government’s 2009/10 budget. He says Cayman’s government will face some tough decisions if it is to meet the 2015/16 deadline set by the UK.  

“You’re either going to have a lot of revenue or you’re going to have pay down some of your borrowing, or both,” Mr. Byles said. “I’m not saying its impossible by the way, but I am saying it’s going to be challenging.”  

Mr. Byles said the divestment of certain government assets may be the only way to drum up enough revenues to pay off Cayman’s existing debts.  

“The other option would be to cut your expenses significantly,” he said. “But that wouldn’t be a good thing, because of the way the economy is right now. It needs to be done over the long term.”  

Mr. Bush has long maintained that privately financed initiatives and public-private partnerships are still on the table with regard to several government projects.  

“The primary objective of this strategy is to minimise the financial burden of these developments on the public purse while simultaneously creating new economic activities,” the Premier said during a speech to the Legislative Assembly earlier this year.  

Cayman’s opposition political party remains unsold on the prospect of divesting certain government assets in a process which Opposition Leader Alden McLaughlin has said looks to him like a high-interest, off the balance sheet loan deal.  

“The curious thing about all of this is that despite these assertions [about asset divestment]….[the Premier] hasn’t said what are the benefits that will actually accrue,” Mr. McLaughlin said earlier this year.  


Cayman must publish debts   

The Cayman Islands would be required to publish reports on all contingent and actual liabilities – including those in the public pensions and healthcare systems – under the framework agreement.  

Under the plan, government would be required to evaluate pensions and healthcare systems once every three years. Those actuarial assessments would have to be published within three months of receipt by the government.  

The Cayman Islands Public Service Pensions system has performed an actuarial evaluation on its various investment funds at least once every three years, but it has not published the results of the two most recent reviews done in January 2008 and January 2010. 

The last time any actuarial evaluation of the country’s healthcare liabilities was done occurred in 2004, according to records submitted with a government bond offering.  

An evaluation done in 2008, according to the bond offering, put the unfunded liability figure at US$248.4 million (CI$204 million, using an 0.82 conversion rate, US dollars to KYD).  

There was another estimate on pension liabilities, presented as part of the 2009 bond offering, that put the unfunded liability in Cayman’s three Public Service Pension funds at US$324.8 million (CI$266 million). The more recent Miller-Shaw report in 2010, estimated the Public Service Pensions system’s unfunded liability at US$400 million, but it was unclear what estimates were used to arrive at that figure.  

The 2009 bond offering memorandum made an estimate of US$798 million (CI$654 million) in unfunded liabilities for health-care coverage due to Cayman Islands civil servants. The figure was based on an actuarial estimate done in 2004. 

The projections are essentially accountants’ best guesses at what the government will owe for the total benefit package at civil servants’ expected retirement dates – which can be up to 40 years in the future.  

Statements contained in an auditor general’s office review have indicated two actuarial reviews of the public pension system have been done since the report dated 1 January, 2005. An actuarial review is done to determine what the estimated assets of the retirement fund will be compared to estimated liabilities over a period of years, essentially to determine whether – in the actuaries’ view – the fund will have enough money to cover what it is required to pay in future years. 


Work ahead  

The Framework for Fiscal Responsibility document calls for controlling government expenditure; limiting new borrowing; realigning the revenue base; improving the performance of statutory authorities and government companies; and reducing costs by working in partnership with the private sector. 

It outlines a number of requirements for delivering value for money with regard to projects and to ensure the government’s procurement process is handled above-board. “There are five key stages that will be undertaken by the Cayman Islands  

Government in the planning, development and execution of a project,” the framework states, listing appraisal and business case; procurement; contract management, delivery and evaluation. 

All public projects must be “suitably appraised before the procurement stage to ensure value for money and that a robust cost-benefit analysis has been carried out”, according to the framework. The appraisals must result in a business case that demonstrates the economic need for the project and lists the risks associated with it.  

The document cites strict procedures for non-compliance with financial deadlines. If Cayman fails to do so, it would be required to present for the approval of the UK Secretary of State a plan that will remedy the breach within three fiscal years from the point the breach occurred. 

During any time of breach in the framework agreement, the Cayman Islands will be required to obtain, on an annual basis, the approval of the Secretary of State before: Finalising the government’s Strategic Policy Statement; proceeding with any public borrowing or refinancing of public borrowing; proceeding with any project with a lifetime value of more than $5 million; using public assets as collateral as part of any arrangement with a non-government entity; pledging any government revenue stream as collateral for borrowing or debt; or divestment of public assets.  

“For the avoidance of doubt, any failure to comply with the borrowing limits or forecast failure to comply within the lifetime of the [Strategic Policy Statement] will be deemed a failure to comply with the Framework,” the document reads. 

Mr. Bush said senior civil servants of the Cayman government had reviewed the Framework document and had provided suggested changes that were discussed with the UK Foreign and Commonwealth Office on 23 and 24 November in London.  

According to a statement released by the UK’s Foreign and Commonwealth Office, the framework “demonstrates the Cayman Islands government’s commitment to prudent and transparent fiscal management through effective medium-term planning and putting value for money considerations at the heart of decision making”.  

“The agreement of a Framework for Fiscal Responsibility with the Cayman Islands government is a strong example of the UK Government’s strategy towards the Overseas Territories in action,” said Overseas Territories Minister Henry Bellingham. “The strategy aims to help territories strengthen public financial management and economic planning and this Framework is a clear sign of the Cayman Island Government’s commitment to those goals. I am sure this development, and returning the public finances of the Caymans Islands to a sustainable footing, will be welcomed in the Cayman Islands and internationally.” 

UK territories meetnig

Representatives of the UK and its overseas territories meet in London Wednesday, 23 November.