Navigating the Future: Challenges Ahead

By Honourable Marco Archer

Minister for Finance and Economic Development
24 November 2016

Introduction
Good Morning Ladies and Gentlemen, it is indeed my pleasure to have been invited to speak this morning, Day 2 of Professional Development Week 2016. This week of activities presents a unique opportunity for those of us involved in Public Sector Financial Management to network with our colleagues in the private sector and to learn from the educational sessions presented by experts in a variety of areas relevant to sound financial management and reporting.
This year’s theme Navigating the Future: Challenges Ahead is timely and relevant given today’s rapidly changing and unpredictable world.
Like it or not the Cayman Islands is a part of the global village and, by the grace of God, our economic, social and financial well-being is determined by our ability to prepare for and navigate through the financial challenges that lie ahead.

Therefore, it is absolutely necessary that our preparation is informed by our past experience. When our Cabinet took Office in May 2013 we placed high on our list of priorities the improvement of public sector financial management and operational performance. During my first budget address in October 2013 and for the next three years, I set out the Government’s fiscal policies which have consistently tightened the reigns on public sector spending, lowered public debt, reduced the tax burden, increased our cash reserves, raised the bar for accountability on how tax payers dollars are spent, and pushed agencies to improve the quality of financial statements being produced across the public sector.
Our goal for public sector financial management and reporting is simply full compliance within the 2018 fiscal year! That is what we are striving for, that is what the public demands of all of us charged with the management and use of public resources. We each have a key role to play, whether we realize it or not, because we are only as strong as our weakest link. Each of us will have to dig deep, and perhaps deeper than we have dug before. But succeed we must because our citizens are depending on us for their prosperity and well-being.
Over the years we have all seen the Reports by the Auditor General and the many stories in the media regarding some missteps in financial accountability within the Public Sector. These reports and stories have not gone unnoticed and the Cabinet has made it clear to all that creditable plans must be implemented to address these issues.
As Minister of Finance and Economic Development I have made it very clear to my Team that we must strive for perfection in our financial management and demand the same from our colleagues across the Public Service. Much of this work has already commenced and collectively, our efforts are starting to bear fruit.
It is absolutely crucial for the Cabinet and the wider public to be given timely and accurate financial information for the public sector in order to development and implement sound and effective strategies for the Country. However, at the moment this is much easier said than done.
For those of you who have been involved in the actual processing of financial transactions you are aware of the struggle over the years for us to fully transition from cash to accrual accounting for all of our transactions.
This is one of the main reasons why over the past couple of years there has been intense pressure on Agencies to improve the quality of their financial statements. And, I am happy to report that there has been significant improvements at the individual Agency level and wish to offer my thanks to Chief Officers, Chief Financial Officers, the Cayman Islands Audit Office and the Treasury Department for their combined efforts in improving this state of affairs. But, we will not become complacent.
Current State of Financial Management
Our combined efforts to improve public sector financial management have started to pay significant dividends in terms of our overall financial performance.

Over the past 3 financial years the Government has achieved the following:
• Improved Cash Balances – Operating cash balances have grown from $117 million at 30 June 2013 to some $408 million at 30 June 2016, this is the highest balance ever recorded by the Cayman Islands Government;
• Eliminated Operating Overdraft facilities – Overdraft Facilities for Core Government were eliminated in July 2014. This was an impressive feat when you consider that the Overdraft balances peaked at some $66 million in 3rd quarter 2012 and in the 2013/14 financial year, ending 30 June 2014, the overdraft facility cost the Government some $844,000 in interest and fees;
• Significantly reduced public sector debt – Entire Public Sector debt (inclusive of SAGCs) has fallen steadily from $709.76 million at 30 June 2013 to $593.19 million at 30 June 2016;
• For the Core Government, debt has fallen from $575.2 million at 30 June 2013 down to $503.3 million at 30 June 2016.
• Achieved full compliance with the Framework for Fiscal Responsibility (FFR) – The FFR which came into effect in December 2012 set stringent financial targets for the Cayman Islands Government to meet. The Government has met or exceeded all of the requirements of the FFR and is on track to maintain compliance for the forseeable future;

• Significant improvement in the timeliness and quality of audited financial statements – Audits of Core Government entities for the 2012/13 financial year resulted in 50% of them receiving an “unqualified” or Clean opinion; 38% receiving a “qualified” opinion and 12% receiving a Disclaimer of opinion. For the 2015/16 financial year for the audits completed to date for Core Government, 90% of these audit opinions have been “unqualified”, 10% have been qualified and no Disclaimers have been issued. This is a drastic improvement from 2012/13.

In the case of our Statutory Authorities and Government Owned Companies, for the 2012/13 financial year 63% of the audit opinions were ”Unqualified,” 30% were qualified, and one was disclaimed. Thus far for the 2015/16 audits completed for SAGCs 78% of these have been “unqualified” and 22% were qualified with no Disclaimers to date. In addition, at the consolidated Entire Public Sector (EPS) level we have worked to remove or, at least significantly reduce, major issues affecting the quality of Accounts being produced. More specifically we have:
• Enhanced the consolidation process by implementing a standardized approach which has resulted in reducing the value of non-reconciling items for inter-agency transactions from approximately $160 million at the end of the 2012/13 financial year to less than $1 million in 2015/16;
• Commissioned a comprehensive valuation of Government’s Property, Plant and Equipment enabling a significant update to our Asset values as at 30 June 2016;

• Commissioned a comprehensive review and valuation of the Government’s long term pension Liabilities managed through the Public Service Pensions Board.

These achievements in our financial management and reporting are significant by any standard and have helped the Cabinet to bolster its fiscal policy which remains centered around aggressive targets for controlling operating expenditure, improving revenue collection, building cash reserves, reducing debt, and improved strategic planning for of the Government’s capital investments.

Challenges and Next Steps
So, where do we go from here? I want to ensure that we build on our success, learn from our mistakes and continually strive to improve our financial management, our performance and our reporting and the degree of compliance with International Public Sector Accounting Standards (IPSAS). Some of the major challenges identified by the Ministry of Finance and Economic Development which we are tackling in the short to medium term include:
• Simplification of the Financial Management Framework;
• Improved Reporting; and
• Enhanced compliance with Accounting Standards.

Simplification of the Financial Management Framework
The financial management framework for the Cayman Islands Public Sector is fairly complex and is split into two parts: Core Government Sector which consists of some sixteen (16) Ministries, Portfolios and Offices (“MPOs”); and the SAGCs which consists of twenty seven (27) Statutory Authorities and Government Owned Companies. The complexity is further revealed when you drill down and realize that each organization within the Core Government Sector is split into Executive and Entity elements.
This complex structure which is set out in the Public Management and Finance Law (PMFL) and its regulations has presented some significant challenges for the Government over the years particularly when it comes to the Audit function carried out by the Auditor General’s Office and the communication to the legislators and public of how well Government Agencies are actually managing their finances.

Under the current regime, the Auditor General’s office audits and opines on the individual MPOs financial statements which reflect only the Entity portion of the MPOs activities. They do not capture the Executive transactions that the MPOs undertakes on behalf of Cabinet. For example, Coercive Revenue, Transfer Payments, and Other Executive Expenses are excluded from the Entity financial statements. Instead these Executive type transactions are captured and reported in the Consolidated EPS Financial Statements produced by the Treasury Department.
The Ministry of Finance is currently in the process of drafting a series of amendments to the PMFL that will redefine the Government’s financial management structure, overhaul budgeting, and enhance the transparency of the financial functions of Government.
Improved Reporting
Ever since the implementation of the PMFL the Government has struggled to provide the type of financial and performance reporting originally envisioned when that law was implemented. Over the last few years the focus has been on producing audited financial statements only. The problem is that the financials only tell us part of the story, they do not give us important information about the actual performance of the activities that the Agencies are charged to carry out, such as, how well they have managed their resources; what are their operational risks and challenges; and how well have their activities contributed to the Governments strategic outcomes and objectives?
For the 2015/16 fiscal year which ended on 30 June 2016 the Government has mandated that all Agencies produce Annual Reports detailing their performance during the year. This represents a significant advancement in our Reporting requirements and will enhance transparency and accountability across the Public Sector.
Enhanced Compliance with Accounting Standards
We are always striving for improvement in how we work, and when it comes to financial management our ultimate goal is to operate in full compliance with the prescribed Accounting Standards. We acknowledge that, at present, we are not in full compliance. However, with each cycle we push to improve our degree of compliance with the Accounting standards. This journey has been a slow and iterative process but we have made steady progress.
One area that remains a major challenge for the Cayman Islands Government is revenue completeness. Revenue completeness is the process of verifying that all revenue earned and due to the Government, is accurately recorded in its financial statements.
The Office of the Auditor General has not been assured that revenues recorded in the Public Sector’s financial statements are complete. This is one of the reasons leading to the issuance of an adverse audit opinion on the Entire Public Sector’s financial statements.
The inability to confirm revenue completeness is a symptom of a bigger problem which is the inadequate or lack of internal controls to ensure that the risk of revenue leakage is mitigated and controlled.
What is required is an assessment of our control environment at each revenue collection agency to determine the gaps in internal controls from the collection, recording, and reporting of revenue.
Therefore, the next steps necessary to improve and enhance revenue completeness are as follows:
• an assessment of internal controls around revenue;
• the development of a risk management policy with respect to revenue; and
• recognition by each revenue collection agency that it is their responsibility to ensure the completeness of their revenue.

Another significant future challenge facing Central Government is the treatment of post-retirement healthcare costs. The amounts involved with this important matter are significant. Discussions with the Civil Service with respect to cost sharing arrangements – likely to include choice of healthcare service providers – are expected to be finalized by 2018.
Overcoming these challenges will require great effort and determination. I accept that the audit opinion with respect to the 2016/17 financial statements may not be an unqualified or “clean” one.
However, I expect full compliance with the accounting standards which should result in a clean audit opinion for the 2018 fiscal year when all plans and policies to improve compliance have had time to become fully effective.

Conclusion
Most of you in this room are directly involved in some aspect of public sector financial management here in Cayman and I want to challenge each of you to strive for perfection within your respective areas.
If we all strive for perfection we will transform the culture of our public service, improve our standards of performance and accountability; and ensure that we have the ability to navigate the challenges ahead of us.
We have a moral obligation to ourselves and future generations to do our best to make things better. And, by the grace of God, from a financial management perspective, I believe that we have done so over the last few years and we are now positioned to continue moving in that direction.
As we have done in the past, we will not shy away but will continue to make decisions with respect to difficult issues such as the challenges that I have outlined earlier. Such decisions will result in improved Public Sector financial management, performance, and reporting and will benefit everyone living and working in the Cayman Islands.
Thank you all for your time this morning and I wish you a productive and successful Professional Development Week.