Net Public Debt Up $184.9M In Fiscal 2019/20

“Net Public Debt, which excludes guarantees and is net of the Government Borrowing Sinking Fund increased by $184.9 million during fiscal 2019/20 standing at $2.646 billion at the year-end,” Minister of Finance Curtis Dickinson said.

Speaking in the House of Assembly today [March 26], the Minister said, “I rise today to advise Honourable Members of the completion of the audit of the Consolidated Fund Financial Statements for the year-ended 31 March 2020, which were tabled in this Honourable House today.

“The Consolidated Fund [“CF”] is the general operating fund of the Bermuda Government and is the Fund through which Government conducts the majority of its transactions. The CF financial statements report the financial position, operations, change in net debt and cash flows resulting from the activities of the Government.

“I am disappointed to report that the Auditor General gave a qualified audit opinion on the 2019/20 annual accounts of the CF of the Government. The CF previously received unqualified opinions for the years 2013 through 2017. The items that precipitated the 2018 qualified opinion were rectified, resulting in a return to clean opinion for the 2019 audit.”

The Minister added, “Net Public Debt, which excludes guarantees and is net of the Government Borrowing Sinking Fund increased by $184.9 million during fiscal 2019/20 standing at $2.646 billion at the year-end compared to $2.419 billion in 2019.This represents an 8% increase from 2019;

“The all-inclusive results from the government operations [both current and capital] on an accounting accrual basis for the year ending 31 March 2020 were a deficit of $346.2 million, $222.8 million higher than the prior year’s deficit of $123.3 million. This is due primarily to the valuation allowance for the Caroline Bay project and first-time provisions for doubtful collections of amounts owed to the CF by other public sector funds or organisations.”

The Minister’s full statement follows below:

Mr. Speaker, I rise today to advise Honourable Members of the completion of the audit of the Consolidated Fund Financial Statements for the year-ended 31 March 2020, which were tabled in this Honourable House today.

As Honourable Members are aware the Consolidated Fund [“CF”] is the general operating fund of the Bermuda Government and is the Fund through which Government conducts the majority of its transactions. The CF financial statements report the financial position, operations, change in net debt and cash flows resulting from the activities of the Government. This includes the accounts of the Senate, the House of Assembly, all Government departments and offices and all courts.

Mr. Speaker, I am disappointed to report that the Auditor General gave a qualified audit opinion on the 2019/20 annual accounts of the CF of the Government. The CF previously received unqualified opinions for the years 2013 through 2017. The items that precipitated the 2018 qualified opinion were rectified, resulting in a return to clean opinion for the 2019 audit. The basis for the qualified audit opinion is as follows:

• 1. Inventory departments within the Ministry of Public Works were unable to perform the physical inventory count at year end due to the constraints of COVID-19 and associated shelter in place, and were unable to perform a determination of the slow moving and obsolete items;

• 2. The Department of Marine & Ports were unable to provide support for their physical inventory results. There was also no related provision for obsolescence for this department’s inventory balance; and

• 3. The auditors were not able to satisfy themselves on these inventory balances using alternate procedures.

Mr. Speaker, regarding the Auditor General’s inventory qualification, Honourable Members are advised that the approximately $6 million in inventory, in the view of the Ministry of Finance, does not cause the audited financial statements to be misleading.

Mr. Speaker, under the Audit Act 1990 section 6[1] [b], the Auditor General is able to include in her report any comments she considers appropriate. Accordingly, the Auditor General has for the tenth consecutive year included an “Other Information” section on matters she deems appropriate. For the 2020 report she has also included an “Emphasis on Matter” section. The “Other Information” relates to the following:

• Public Debt and Guarantees – The Auditor General has highlighted that while the Government is within the legislated debt limit of $2.9 billion, there is a further $952 million in guarantees to various lenders by the CF;

• Increasing Net Debt – The Auditor General has noted that net debt, as calculated on the Statement of Changes in Net Debt, increased by $329 million, and continues to grow [pg. 8 of the financial statements];

• Usefulness of the Financial Statements – The Auditor General explains that the usefulness of the financial statements is limited because they are not “Summary Financial Statements”. In other words, they do not represent the combined financial position and activities of all Government entities, only the CF.

It is important to note that these explanatory paragraphs do not alter the Auditor General’s opinion that the financial statements are presented fairly, except for the matter described in Basis for Qualified Opinion, but are highlighted matters.

However, the Government shares the Auditor’s concerns in these areas and has already begun to tackle these matters. For instance, Mr. Speaker, the Ministry of Finance has already put in place a plan to eliminate the deficit and ultimately reduce the debt. Efforts to address this in Fiscal Year 2020/21 were severely hampered by the challenges related to the COVID-19 pandemic. However, as noted in the Economic Recovery Plan which was presented to this Honorable House earlier this week, Government’s commitment to management of fiscal and economic matters in a fiscally prudent manner remains resolute. Further, as noted in the 2021/2022 Budget Statement, and highlighted as part of that Plan, Government has put in place fiscal guardrails to be adhered to, which, among other things, focus on addressing the deficit and the level of debt.

Mr. Speaker, liabilities related to pension and other employee future benefits are included in the “Net Debt” amount disclosed in the Financial Statements and the Government has already started the review of these benefits to ensure their sustainability.

Mr. Speaker, in relation to guarantees of the CF to various lenders, it is important to clarify that the majority of the guarantees are related to debt taken out by Public Authorities.

Mr. Speaker, guarantees are contingent liabilities to the Government and are not included on the Government’s balance sheet, or counted against the debt ceiling unless the guarantee becomes due and payable by the Government. All guarantees are disclosed in notes to the financial statements of the CF and the annual budget.

Mr. Speaker, with regards to the preparation of Summary Financial Statements for the Bermuda Government, the Ministry agrees there are benefits to issuing consolidated financial statements. However Honourable Members are advised that a key factor in this regard, would be ensuring that there are current financial statements for all public authorities.

The “Emphasis of Matter” contains a paragraph highlighting the uncertainties related to the COVID-19 pandemic. It also provides commentary on the valuation related to the Morgan’s Point/Caroline Bay project. In that regard, the note explains that due to the high level of uncertainty associated with recovering the cost relating to the assets of Georges Bay Limited, a valuation allowance of $183.3 million was recognised and a net carrying value of $1,000 included in the statement of financial position.

The audit report is dated 9 December 2020 [2019: 19 November]. Certain private debt placements made by the Government contain a reporting covenant requiring delivery of the audited financial statements within two hundred forty [240] days of the fiscal year end, [26 November 2020]. Honourable Members are advised that while this reporting covenant was not met, the Government was given prior approval by the lenders to extend the delivery date to 26 January 2021.

A detailed discussion of the highlights of the CF financial statements can be found in the Financial Statement Analysis and Discussion, which is included with the audited statements.

Mr. Speaker, a few of the financial highlights of the 2020 CF Statements are as follows:

• Net Public Debt, which excludes guarantees and is net of the Government Borrowing Sinking Fund increased by $184.9 million during fiscal 2019/20 standing at $2.646 billion at the year-end compared to $2.419 billion in 2019.This represents an 8% increase from 2019;

• In September 2019, the Government entered into a credit facility with Butterfield and HSBC Bermuda for $200 million. The proceeds were used to purchase the lenders’ rights and interest under the Morgans Point/ Caroline Bay guarantee; and

• The 2020 Sinking Fund balance was $41.3 million compared to $218.9 million in 2019. $180 million of senior notes matured and were paid off during the fiscal year.

Mr. Speaker, total revenue raised by the CF for fiscal 2019/20 was approximately $1.09 billion representing a decrease of $14.1 million [- 1.3%] from fiscal 2018/19 total revenue of $1.1 billion. This is $32.1 million below the original budget estimates. The most significant generators of revenues for fiscal 2019/20 were Payroll Taxes, accounting for $465.0 million or 42.8% of total revenue [2019: $467.5 million or 42.7%] and Customs Duty, accounting for $221.9 million or 20.4% [2019: $226.1 million or 20.7%].

Current expenses for fiscal 2019/20 were $1.392 billion [2019: $1.187 billion]. The four largest components of current expenses were employee costs, grants and contributions, the Morgans Point/Caroline Bay valuation allowance and interest on debt. Total employee costs were $558.5 million or 40.1% [2019: $550.1 million or 46.3%] of total expenses. Included in this amount is $78.1 million [2019: $78.52 million] of non-cash retirement benefit expenses. Grants and contributions were $323.9 million or 23.3% [2019: $319.2 million or 26.9%] and interest on debt was $120.5 million or 8.7% [2019: $124.0 million or 10.4%]. The Morgans Point/ Caroline Bay valuation allowance totaled $183.3 million, and was deemed appropriate due to the significant measurement of uncertainty in the valuation of the amounts expected to be ultimately recovered by the Government. Total current expenditure on a modified cash basis was $1.05 billion [2019: $1.11 billion], which was $5.44 million more than the adjusted budget [2018/19: $7.9 million less].

Mr. Speaker, total capital account cash expenditure was $67.1 million, which was $2.4 million higher than the original budget estimates.

Total capital and current account cash expenditure for 2019/20 was $1.119 billion, which was $7.8 million or 0.7% higher than the original budget estimate of $1.111 billion.

Mr. Speaker, the all-inclusive results from the government operations [both current and capital] on an accounting accrual basis for the year ending 31 March 2020 were a deficit of $346.2 million, $222.8 million higher than the prior year’s deficit of $123.3 million. This is due primarily to the valuation allowance for the Caroline Bay project and first-time provisions for doubtful collections of amounts owed to the CF by other public sector funds or organisations. If we remove the non-appropriated expenses; and the non-recurring items related to the Caroline Bay project; the modified cash basis all–inclusive results from government operations [the same basis used in the Budget Book] was a deficit of $32.5 million. The original estimates forecasted a budget surplus of $7.4 million. Therefore, the actual deficit was up by $40.7 million when compared to the original estimate.

Mr. Speaker, in closing, I would like to express my sincere appreciation to the Auditor General and her team, the persons in the Accountant General’s Department and those in other ministries who were involved in ensuring a successful audit. These statements provide valuable information on the financial position of the Government, and I would encourage the public to examine these statements.

Thank You, Mr. Speaker.

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