The following is a letter from James Bergstrom on behalf of the Coalition for Cayman (C4C), although addressed to The Caymanian Compass was also sent to other media houses in Cayman.

The letter says the Progressives Government has not reduced spending anything like enough especially the number of civil servants and their benefits.

Bergstrom says the government’s growing expenses must be cut by $100M, should roll back fees in the financial sector, cash should be paid into statutory authorities, government services should be recentralized and nothing is included in the budget to prepare for the government debt bond that is looming.

The letter recommends government should follow the Miller-Shaw Report.

It will be interesting to read government’s response.

29 January 2014

The Editor of the Caymanian Compass

George Town

Grand Cayman

Cayman Islands

Dear Sir,

Re: Understanding the Budget

Recent comments from the Government that the worst is behind us, accolades for the new approach to managing the Country’s finances and the well publicised $100 million surplus in the budget prompted the Coalition for Cayman to review the current budget to examine whether such comments are justified. In short, they are not.

This exercise involved getting to grips with our budget. This is no easy task. However, it is more difficult to try to explain in less than a volume – the annual budget, plan, and agreements run to 2,139 pages. The approach we have taken is far from perfect but we think that as a rough review it works. The budget itself includes many areas where different categories appear to cover the same or similar services. In order to get an overall picture we created a number of buckets and then attributed to each bucket all areas in the budget that are related. We then did a comparison between the last two years where each Party was able to prepare the budget for the full year. Therefore the election year separates the two. This means that the very substantial increases in revenue measures should not be solely attributed to the current Government.

The commentary below is separated into three parts, each with a supporting table. All numbers are in Cayman Islands dollars.

Part 1 – Debt+ Liabilities and change in Annual Position

Here are some of the key points to note:

•      Total liabilities, covering the entire Public Sector, are $1.7 billion ($53,000 per Caymanian).

•      $102m reduction in long term debt is largely offset by $73m increase in short term debt (creditors/ overdrafts).

•          Total unpaid and unfunded retired civil service pensions and health care costs are $859m, the equivalent of $27,000 per each Caymanian citizen* (*ESO 2012 = 32,201 Caymanians).

•      Core Government projected operating surplus of $100m is largely derived from $97m (+18%) increase in revenue/ taxes (see Part 2: Revenue below).

•          Once annual required debt repayments, equity injections (transfer payments) to other Public Authorities, financial and capital expenditures, are factored in the “surplus” drops to $22m (3% of revenue).

•      No funds are allocated for the future $665m retiree civil service health care liability.

SEE APPENDIX 1

Part 2 – Revenue

Here are some of the key points to note:

•          Coercive Revenue rises $124m (+25%) to $612m.

•          Revenue from financial and legal industry rises $83m (+47%) to $260m.

•          Revenue from duty and charges rises $17m (+9%) to $201m.

•          Revenue from the tourism industry rises $11m (+50%) to $31m.

•          Exempt company fees and partnership fees each have fee increases of over $20m.

•          Bank and trust licenses and mutual fund administrators have increases of 46% and 22% respectively.

SEE APPENDIX 2 & 3

Part 3 – Expenses

Here are some of the key points to note:

•          Civil service salaries are reduced -0.3% by $0.5m to $180m.

•          Civil service pension and healthcare costs for past and present employees rise +36% from $55m  to  $75m  annually  ($36m  current  employee  healthcare, $21m  current  employee pension, $18m past employee healthcare).

•          Total Community Medical Care expenses increase +25% from $56m to $69m.

•          Education Expenses rise +23% from $60m to $74m representing approx $9,300 per student.

•          Social Assistance increases +15% from $33m to $37m.

•          Policing rises +7% from $30m to $32m. Fire increases +20% from $5m to $6m.

•          Statutory Authorities require shortfall funding of $63m. This is made up of equity injections and transfers payments of $25m + Cayman Airways $23m + direct funding $15m.

•          Tourism has had its funding reduced by 24% from $21m to $16m.

•          Regulation and Licensing (much of this relates to the Financial Services Industry) is reduced -29% from $21m to $15m.

SEE APPENDIX 4

Critical Issues

1          Unsustainable debt

$1.7b in total liabilities is too large for the size of the Cayman population. A large part of this is the $859m unfunded civil service benefits and this must be tackled before it sinks the Country.

In the 2010 Shaw Miller Report (p40-1), it was estimated that it was going to cost $665m to pay for the future civil service health care costs and that medical care inflation costs would be approximately 5%.  Therefore our total bill to pay for the future civil service health care costs is likely to be over li billion in today’s terms. $665m (2004 estimate) + $418m (inflation 2004-2014@ 5%) = $1.083b. No reserve is being created to provide for this future obligation.  Additionally the pension plan is still owed $194m based on its own 2011 valuation.

The Government must put in place a plan to provide for this obligation now with a minimum annual payment set aside to cover this massive health care expense. Firstly, we need to understand what the current amount actually is by having an up to date actuarial estimate of the health care costs performed, and secondly this estimate needs to come from an independent widely recognized source for the most accurate information possible.

The Government has in issue a US$312 million bond maturing in November 2019. According to the Miller-Shaw report, the Government also has in issue a bond note with principal of US$93 million issued in 2003 that matures in April 2018. We are not aware of any plan that is in place to deal with this large amount of debt coming due in 5 years.

2          Unsustainable expenditure

The Government employs 3,606* civil servants and a further 2,283* are employed through the statutory authorities. Additionally, we now have around 80 statutory boards in place. (*ESO 2012) The guide should be for the cost of government services to be in the region of 15 to 20% of the Government’s annual revenues. Currently we are at 39% (core government) and 46% (entire public sector). The spending on the Government services needs to be reduced by $1OOm+ to bring it in line with the suggestions in the Miller report – to get to the 15 to 20 % of revenue range discussed above. Such cuts would result in a major blow to the economy and social unrest unless they are done in a thoughtful and managed way. Our suggested approach is set out below.

All non essential services currently provided by the Government should be moved to the private sector. This is a significant opportunity for the civil servants currently working in these departments. Those employees should be given the opportunity to set up their own companies to provide these services to the Government. The Government assets currently employed in providing those services should be transferred to those employees at no or a low cost. Those new companies should then be given an exclusive contract to provide those services for, say, three (3) years. After three years, they would have to make a competitive bid to retain the contract.

The new National Workforce Development Agency (“NWDA”) should assist those who do not move over as part of the privatization. The NWDA would work closely with the Immigration department to identify jobs where the current employees are on work permits. The NWDA would identify suitable civil servants for each of the positions and would then provide the training needed to equip them for the positions. These jobs may be in the hospitality industry and will not necessarily be office jobs. If the civil servant does not accept a fair offer of employment and transfer over, then they would be given their notice. This transition would need to be staged over a two to three year period.

Part of the implementation of the Public Management and Finance Law resulted in the decentralization of support services. This has led not only to a significant increase in the civil service but also general inefficiency. There would be considerable savings and efficiencies if all support functions were centralized, including the following functions – Finance, HR, Operations, IT and PR.

The cost of the civil service pension and health care costs is increasing rapidly, now reaching $75m annually (contrast with the entire police budget at $32m). It is essential that the members of the civil service have their pension and health benefits aligned to those offered in the private sector.

These changes would require the elected Government, the Governor/FCO and the Deputy Governor to all work together to agree and implement a plan. The result should be an invigorated civil service being paid in line with their private sector counterparts and being fit for purpose

3         Actions taken that need to be reversed

In an attempt to balance the books, Cayman’s two flagship industries, financial services and tourism, have seen massive fee increases whilst the funding to the Government departments that support these industries has been drastically reduced.

The PPM campaigned on the basis that they would reverse several of these punitive revenue measures but did not do so in the budget They should plan now to roll back these fee increases and review the levels of funding to those departments.

4          Growing social assistance

One of the Coalition’s founding principles is “a belief that it is the responsibility of individuals to provide for themselves, their families and their dependants, whilst recognizing that government must respond to those who require assistance and compassion”.  Social assistance expenditures have increased from $33m to $37m (12% increase). The whole program of social assistance by the Government needs to be reviewed and restructured so that it is designed to provide a hand up rather than a hand out, be monitored and in most cases finite, and properly directed to our most vulnerable.

The Coalition for Cayman delivered a paper entitled “Our Government” to the new Government immediately following the election last year.  This paper deals with many of these issues in more detail and offers a number of other suggested actions.     It is available at http://www.coalitionforcayman.ky/wp-content/uploads/2013/05/0ur-Government.pdf.

The Government, the new Governor and the Deputy Governor all have an opportunity to be remembered as taking the necessary actions to turn the Country around.  However, this change will not come about without tackling the fundamental issues raised in this letter.  The current approach is just tinkering around at the edges.

Yours faithfully,

James Bergstrom (signed)

Coalition for Cayman