Unaudited Statements To June 2024 Show That Government Continues To Misstate Its Net Assets By $2 Billion. Surplus Also Overstated.

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By Alric Lindsay

A supplement to extraordinary gazette no. 58/2024, dated August 9, 2024, contained the unaudited financial statements of the Core Government for the six-month period ended June 30, 2024. However, based on previous statements made in the Public Accounts Committee by the Office of the Auditor General, the Financial Secretary and the Accountant General, the statement of financial position continues to be misstated by over $2 billion. The reported surplus is also misstated.

Misstatement of statement of financial position

The statement of financial position misstatement relates to net assets, reported as $2.4 billion in the six-month period ending June 2024.

Concerning this, one of the latest Auditor General’s Reports stated:

The Government did not record liabilities relating to its post-retirement healthcare programme.

The health care liability actuarial valuation results for core government estimated the post-retirement health care net liability to be $2.4 billion, post-retirement medical expenses of $148.4 million and other comprehensive income of $34.9 million.

The Office of the Auditor General pointed out that failing to include $2.4 billion in post-retirement medical expenses in the financial statement goes against the requirements of IPSAS 39, which pertains to Employee Benefits Disclosures.

This issue was also highlighted during the 2023 Public Accounts Committee meeting by the Office of the Auditor General.

The Office of the Auditor General explained:

… the Government is not currently reporting information that is needed for proper accountability, for example, the total cost of the liability for post-retirement benefits.

The omission of that cost from the Financial Statements for the entire public sector means that the public doesn’t have accurate information on the entire financial position of the Government’s accounts.

The omission of that single figure has made a significant contribution to the adverse audit opinion that we have been issuing on the entire public sector accounts in previous years, and the audit opinion will not change until that issue is resolved.

At the 2023 Public Accounts Committee meeting, the Financial Secretary, Kenneth Jefferson, confirmed the accuracy of the statement made by the Office of the Auditor General.

He stated:

…there really has been no significant progress, in terms of getting the Government to agree to put the item fairly and squarely on the face of the balance sheet of the Government just as it has the unfunded pension liability number of around $400-plus million of the unfunded pension liabilities on the balance sheet itself.

There isn’t a similar number on the government’s balance sheet for post-retirement healthcare costs.

What we do, Mr. Chairman, and you will probably remember it from your time as the Minister for Finance is, every single month the note that goes to the Cabinet details the extent of the liability and the financial performance note and position note make it clear that those figures do not show, do not include, the postretirement healthcare liability.

Kenneth Jefferson, Financial Secretary

Mr. Matthew Tibbetts, Accountant General, also confirmed the predicament.

He said:

…on the face of the statement of financial performance you will see:

The activities of the core government;

The revenues, expenses, et cetera;

The net income of core government; and

A one-line item that says the net results of the Statutory Authorities and Government Companies—that amount would be where their net effect is factored into our books. After that, you also have a line showing the net income of the entire public sector.

He continued:

It doesn’t change the fact that they have included the post-retirement healthcare liability and the Core Government has not; it just shows, obviously, that the result after factoring it into theirs, makes the overall situation a bit worse.

It doesn’t change the fact that the Core Government needs to focus on getting it included into our accounts.

It’s been a longstanding issue and definitely something we want to focus on doing should the political arm have the will.

Mr. Matthew Tibbetts, Accountant General

Misstatement of the surplus

Another item of concern is the Government surplus of $203,170,000 reported in the unaudited financial statements to June 2024. Based on the previous comments from the Financial Secretary, this is a misstatement.

The misstatement is due to the fact that the Government did not properly record post-retirement healthcare liability.

Explaining this, the Financial Secretary said the following in the 2023 Public Accounts Committee Meeting:

… the annual cost of it is not included as a part of the government’s calculation of a deficit or a surplus.

It is not there, but it is in the monthly Cabinet note as well as it is in a note to the Government’s Financial Statements.

The honest answer is that no significant progress has been made on the matter of moving it fairly and squarely onto the face of the Government’s primary financial statements.

He continued:

Mr. Chairman, just to give the public some sense of magnitude, in terms of the impact on the income statement or the surplus and deficit of the government, if we were to fully account for post-retirement healthcare costs on an annual basis, then the hit on the surplus figure would be in the region of just over $100 million each year.

That is obviously a hugely significant figure and would be sufficient to turn an otherwise surplus into a deficit.

I know that you have heard this, many times before, Mr. Chairman, but to the public: that is what we would get.

No reasons were given for misstatements

While a Freedom of Information request was made to determine the reasons for the misstatements, no reasons could be found in the Freedom of Information response, which provided links to the Public Accounts Committee minutes and other published reports. To be clear, these documents only state that the $2.4 billion in post-retirement medical expenses is not reflected in the statement of financial position.

Notwithstanding that the documents do not provide reasons to explain the approach, the Cabinet is clearly aware of the implications of the misstatements because the Financial Secretary said that he notified the Cabinet of the same.

One suspicion is that the exclusion of $2.4 billion in post-retirement medical expenses from the statement of financial position may allow the Government to remain in compliance with the Framework for Fiscal Responsibility agreed between the Cayman Islands and the United Kingdom.

This Framework includes:

Controlling Government expenditure
Limiting new borrowings
Re-aligning the revenue base
Improving the performance of Statutory Authorities and Government Companies; and
Reducing costs by working in partnership with the private sector.

The Framework emphasizes that the Cayman Islands Government is committed to delivering improved accountability mechanisms through the transparency delivered by the Framework and subsequently the revised PMFL and by ensuring that public accounts are:

prepared on a timely basis in line with International Financial Reporting Standards and International Public Sector Accounting Standards; and
subject to an annual external audit – the results of which will be subject to the Public Accounts Committee’s scrutiny and publications.

Lastly, in the event of any non-compliance by the Cayman Islands Government in the respect of the Framework and until the breach has been rectified, the Cayman Islands Government will obtain, on an annual basis, written approval from the Secretary of State before:

the SPS is finalised
any public borrowing or any refinancing of public borrowing is undertaken;
proceeding with any project with a lifetime value of more than CI$10 million;
using public assets as collateral as part of any arrangement with a party external to the Cayman Islands Government, the hypothecation of any revenue stream; or
the divestment of public assets.

A proper recording of the $2.4 billion in post-retirement medical expenses in the statement of financial position and financial performance may have potentially breached this Framework and resulted in the above consequences.

Perhaps there was a desire to avoid this breach over several Government administrations, or, as the Accountant General put it, there may have been an ongoing lack of “will” by the “political arm” to properly record the post-retirement medical expenses in the statement of financial position.

It is even more worrying that the public does not seem to hold the Government responsible for the misstatements in the financial position and surplus.

If accountability at the top is in question or goes unnoticed, the next issue is how the Government and its agencies will convincingly enforce financial reporting obligations on financial services and other industry players if the Government itself is not adhering to accounting rules, including making the necessary bookkeeping entries to obtain a clean audit opinion.