State Finances 2017

Overview

Total State Sector Accounts received an unqualified audit opinion for the fifth consecutive year.

There was a $5.7 billion State budget surplus and continued investment in new infrastructure, in part funded by the long-term leases of Ausgrid and Endeavour Energy assets. This report also comments on key accounting matters, including the correction of some previously reported balances and the first time reporting of combined Cabinet members’ compensation in the Total State Sector Accounts.

Auditor-General's Introduction

Pursuant to the Public Finance and Audit Act 1983, I present my Report on State Finances 2017.

You will note that the format of this report has changed from previous years.

The intent of this change is to draw attention to the key matters that have been the focus of our audit and highlight significant factors that have contributed to the outcome.

First, it is pleasing to report once again that I issued a clear audit opinion on the State’s consolidated financial statements. This outcome demonstrates the Government’s continued focus on the quality of financial reporting across the NSW public sector.

High quality financial management and reporting are crucial to properly inform the public and build community confidence in our system of government.

The Treasury’s Financial Management Transformation program also aims to improve financial governance, budgeting and reporting arrangements across the sector. My Office is working collaboratively with The Treasury on reforms to reduce the burden of reporting, without weakening established safeguards.

The reforms should include measures to provide independent assurance of the budget process, of outcome reporting by agencies, and the power to “follow the dollar” given the increasing use of non-government organisations to deliver Government programs.

This Report also highlights another year of strong financial performance. The State’s budget result was a $5.7 billion surplus, and investment in new infrastructure has continued, in part funded by the long-term leases of Ausgrid and Endeavour Energy assets.

Finally, could I take this opportunity to thank the staff of The Treasury for the way they approached this audit. Our partnership is critical to ensuring NSW is an exemplar of quality financial management and reporting.

02_Margaret_signature.jpg

Margaret Crawford 
24 October 2017

Audit Opinion

A clear audit opinion on the State’s consolidated financial statements was issued.

Timely and accurate financial reporting is essential for informed decision making, effective management of public funds and enhancing public accountability.

This year’s clear audit opinion reflects the Government’s continued efforts to improve the quality of financial reporting across the NSW public sector.

Since the introduction of ‘early close procedures’ in 2011-12, the number of significant errors in financial statements of agencies has generally fallen largely due to identifying and resolving complex accounting issues early. Agencies’ 2016-17 financial statements submitted for audit contained nine errors exceeding $20 million. All errors were subsequently corrected in the individual agencies financial statements.

Agencies should continue to respond to key accounting issues as soon as they are identified. Where issues are identified, accounting position papers should be prepared for consideration by the Audit Office, their Audit and Risk Committee members, and when relevant, The Treasury.

Significant errors in agency financial financial statements exceeding $20M
Key dates for financial statements and audit opinions

Accounting Matters

The State addressed the following key accounting matters during 2016-17. 

The State recognised rail tunnels and earthworks valued at $8.5 billion.

Some rail tunnels and earthworks have never been valued by the State. These include the City Circle, the country rail network and other tunnels and earthworks built before the year 2000. Some of these tunnels and earthworks date back to the early 1900s.

For many years, the State did not account for these assets as they believed that their value could not be reliably measured. This year an independent valuer was engaged to perform a comprehensive valuation. The methodology used demonstrated
that the assets could have been reflected in the financial statements earlier.

The State recorded an additional $8.5 billion to correct the value of infrastructure assets at 1 July 2016.

Cabinet member’s compensation and related party transactions were reviewed.

Due to changes in Accounting Standards, the State had to consider 'related party information' in the financial statements. Previously this only applied to for-profit entities.

This year, requirements to report related party information extended to members of Cabinet, considered to be “key management personnel” of the State, as defined by Accounting Standards.

The Treasury implemented a process to assess and report Cabinet member’s compensation, and transactions between Cabinet members and/or their close family members, and government agencies.

Collectively, Cabinet members’ remuneration was $8.8 million, which was mainly salaries and allowances, and $3.5 million of non-monetary benefits such as security and drivers. The Treasury determined there were no other specific “related party” transactions or balances that required disclosure in the State’s financial statements.

Information system limitations continue at TAFE NSW.

TAFE NSW has experienced ongoing issues with its student administration system.

TAFE NSW has again implemented additional processes to verify the accuracy and completeness of revenue from sales of goods and services.

TAFE NSW expects to spend up to $89 million on a new information system to address these issues. Modules of the new student enrolment system are expected to be in place for the 2018 enrolment period.

Restatements relating to the General Government Sector's investment in the commercial sector.

The State corrected two previously reported balances relating to the General Government Sector’s investment in the commercial sector.

Accounting Standards require the General Government Sector to effectively store gains or losses related to its investment in the commercial sector in reserves until the investment is derecognised.

When these investments are disposed of, the cumulative gains and losses must be cleared and recognised in the operating result. However, the Government had previously cleared the cumulative gains and losses directly to Accumulated Funds within equity.

To comply with Accounting Standards, a total of $6 billion previously reported as a movement in equity  at 30 June 2016, has now been corrected to the operating result.

In addition, Accounting Standards only allow gains or losses on its investments to be stored in reserves. In past years, the State recognised all changes in the value of its investment in Available for Sale Reserves, including the capital contributed to establish the State’s investment. In 2016-17, a total of $23.4 billion of contributed capital was corrected to accumulated funds at 1 July 2015.

State Results

The State’s budget result was a $5.7 billion surplus, $2.0 billion higher than the budget estimate.

The Total State Sector comprises 310 entities controlled by the NSW Government.

Of the total, the General Government Sector comprises 215 entities that provide goods and services not directly paid for by consumers.

The non-General Government Sector comprises 95 Government businesses that provide goods and services such as water and electricity, or financial services.

A principal measure of a Government’s overall performance is its Net Operating Balance, or Budget Result. The Net Operating Balance reports the difference between the cost of General Government service delivery and the revenue earned to fund these sectors.

The State has recorded budget surpluses and exceeded the original budget result in nine of the last ten years.

Net_operating_balance_2013-2017 for General Government Sector and Total State Sector
Net_worth_2013-2017

The State’s net worth increased by $44.7 billion in 2016-17.

This included:

  • a decrease in superannuation liabilities of $12.6 billion primarily due to an increase in the discount rate to 2.62 per cent

  • a decrease in borrowings of $9.5 billion primarily from the leases of Ausgrid and Endeavour Energy assets

  • an additional $8.5 billion in assets to correct the value of rail tunnel and earthwork infrastructure at 1 July 2016.

 A strong balance sheet with robust financial oversight should help the State:

  • maintain its AAA credit rating

  • support a low cost of borrowing

  • attract a wide range of potential investors to the State’s debt issuance and private financing for capital projects

  • respond to emerging fiscal and economic pressures

  • provide capacity to absorb adverse fiscal shocks

  • raise debt in a fiscally responsible manner.

Fiscal Responsibility Targets

The State maintained its AAA credit rating.

The object of the Act is to maintain the AAA credit rating.

NSW’s finances are managed in alignment with the Fiscal Responsibility Act 2012 (the Act).

The Act established the framework for fiscal responsibility and strategy needed to protect the State’s AAA credit rating and service delivery to the people of NSW.

The purpose of maintaining the AAA credit rating is to reduce the cost of, and ensure the broadest access to, borrowings.

A triple-A credit rating also helps maintain business and consumer confidence so economic activity and employment are sustained. The legislation sets out targets and principles for financial management to achieve this.

New South Wales has credit ratings of AAA/Negative from Standard & Poor’s and Aaa/Stable from Moody’s Investors Service.

The fiscal targets for achieving this objective are:

General Government expenditure growth is lower than long term revenue growth.

General Government expenditure growth was 4.2 per cent in 2016-17, below the long-term revenue growth of 5.6 per cent.

Eliminating unfunded superannuation liabilities by 2030.

The Act sets a target of eliminating unfunded defined benefit superannuation liabilities by 2030. The State’s net superannuation liability was $58.6 billion at 30 June 2017 ($71.2 billion at 30 June 2016).

The Government predicts the 2030 target will be achieved. The State’s funding plan is to contribute amounts escalated by five per cent each year so the schemes will be fully funded by 2030. In 2016-17, the State made employer contributions of $1.5 billion, which is largely consistent with contributions over the past five years.

The liability values in the graph below do not reflect the values recorded in the Total State Sector Accounts. For financial reporting purposes, Accounting Standards (AASB 119 Employee Benefits) require the State to discount its superannuation liability using the government bond rate (refer to page 10 of this report). 

The relevant government bond rate in the current economic climate is 2.62 per cent.

The State’s target for the unfunded superannuation liability is measured using AASB 1056 Superannuation Entities. This is because it adopts a measurement basis that reflects expected earnings on fund assets, which are currently between 5.9 and 7.4 per cent. Using these rates, the liability is $15.0 billion at 30 June 2017 ($16.1 billion at 30 June 2016). The unfunded liability is $2.4 billion less than when the Act was introduced.

Superannuation_funding_position since inception of the act - 2005 to 2017 including unfunded liability, superannuation liability under AASB 1056 and net market value of fund assets

State Assets

The State’s assets grew by $31.6 billion during 2016-17 to $409 billion.

Valuing the State’s physical assets.

When we audit the financial statements, we focus on areas we consider as higher risk. These areas are often complex, and require the use of estimates and judgements.

The State has $307.2 billion of physical assets measured at fair value in accordance with Australian Accounting Standards. Fair value calculations are inherently complex and sensitive to assumptions and estimates, increasing the risk these assets are incorrectly valued.

In our audits, we assess the reasonableness and appropriateness of assumptions used in valuing physical assets. This includes obtaining an understanding of the valuation methodologies applied and judgements made. We also review the completeness of asset registers, and the mathematical accuracy of valuation models.

Net movements between years includes additions, disposals, depreciation and valuations. This year, valuations of physical assets added $16.2 billion to the State’s assets, comprising: 

  • Transport for NSW and Railcorp $8.5 billion

  • New South Wales Land and Housing Corporation $4.8 billion

  • Roads and Maritime Services $930 million

  • Crown Entity $400 million.    

The State’s financial assets increased $27.5 billion in 2016-17

The State’s financial assets have increased by 88 per cent over the past four years. In 2016-17, financial assets increased primarily due to proceeds from the sale of government assets and businesses.

The Government implemented reforms to better use the State’s financial assets. A key element was the creation of an Asset and Liability Committee (ALCO) to provide advice on ways to improve balance sheet management.

Since the creation of the ALCO, reforms include:

  • Establishment of the New South Wales Infrastructure Future Fund (NIFF). The net proceeds from the State’s asset recycling program are invested into the NIFF, which is managed by TCorp, with a balance of $14.6 billion by 30 June 2017. Funds raised are invested through the NIFF until the Government requires them for critical infrastructure projects that are part of the Restart NSW and Rebuilding NSW program of works. ALCO and TCorp provide advice on the NIFF’s performance and management

  • Establishment of the Social and Affordable Housing Fund ($1.1 billion at 30 June 2017). ALCO oversees the Fund to ensure an appropriate investment approach that will maintain funding certainty for new social and affordable housing stock

  • Cash and liquidity management reforms to centralise cash previously held by agencies in the Treasury Banking System. This reform is designed to ensure agencies have adequate levels of liquidity but with surplus funds invested centrally for better returns.

Key assets - an 8.4 per cent increase in total assets from 2015-2016 to 2016-2017

State Liabilities

The State’s liabilities decreased by $13.1 billion during 2016-17 to $182 billion.

Valuing the State’s liabilities relies on an actuarial assessment.

Nearly half of the State’s liabilities relate to its employees. This includes unfunded superannuation, and employee benefits, such as long service and recreation leave.

Valuation of these obligations is subject to complex estimation techniques and significant judgements. Small changes in assumptions can materially impact the financial statements.

We address the risk associated with auditing these balances:

  • using actuarial specialists

  • testing controls around underlying employee data used in data models, and testing the accuracy of the calculations

  • evaluating assumptions applied in calculating employee entitlements such as the discount rate and the probability of long service leave vesting conditions being met.

The State’s superannuation obligations reduced by $12.6 billion in 2016-17.

The State’s $58.6 billion superannuation liability represents obligations for past and present employees, less the value of assets set aside to meet those obligations. The superannuation liability decreased from $71.2 billion to $58.6 billion, largely due to an increase in the discount rate from 1.99 per cent to 2.62 per cent. This alone reduced the liability by $9.2 billion

The State’s borrowings totalled $70.6 billion at 30 June 2017.

The State’s borrowings totalled $70.6 billion at 30 June 2017, $9.5 billion less than the previous year. This was largely due to the repayment of borrowings when the assets of Ausgrid and Endeavour Energy were leased to the private sector.

TCorp issues bonds to raise funds for NSW Government agencies. The bonds are actively traded in financial markets providing price transparency and liquidity to public sector borrowers and institutional investors. All TCorp bonds are guaranteed by the NSW Government.

The Government manages its debt liabilities through its balance sheet management strategy. The strategy extends to TCorp, which applies an active risk management strategy to the Government’s debt portfolio.

General Government Sector debt is being restructured by replacing shorter-term debt with longer-term debt. This lengthens the portfolio to better match liabilities with the funding requirements of infrastructure assets and reduces refinancing risks. It also allows the Government to take advantage of the low interest rate environment.

Key liabilities- an 6.7 per cent decrease in total liabilities from 2015-2016 to 2016-2017
Trend in unfunded superannuation liability from 2013-2017 including superannuation liability under AASB 119 and fair value of assets in superannuation funds as well as net unfunded liability

State Revenue

The State recorded revenue of $83.5 billion in  2016-17, an increase of $5.3 billion from 2015-16.

The State’s results are underpinned by revenue growth in taxation, fees and fines.

Taxation, fees, fines and other revenue comprises $30.5 billion of taxation ($28.7 billion in 2015-16) and $5.3 billion of fees, fines and other revenue ($4.6 billion).

Tax revenue for the Total State Sector increased by $1.8 billion, or 6.4 per cent compared to 2015-16, primarily due to:

  • one-off business asset sales and lease transactions, including $718 million in transfer duty from the Ausgrid and Endeavour Energy lease transactions

  • $385 million increase in payroll tax from growth in NSW employment and average employee compensation

  • a $426 million increase in land taxes.

Growth in stamp duty is expected to slow over the next 4 years.

General Government Sector stamp duties have increased from $6.2 billion in 2012-13 to $11.5 billion in 2016-17, an annual average growth rate of 16.5 per cent. The Government’s budget forecasts the growth in stamp duties to decline, to an average annual growth rate of 2.6 per cent between 2016-17 and 2020-21.

The State received Commonwealth grants and subsidies of $30.8 billion in 2016-17.

The State received $30.8 billion from the Commonwealth Government in 2016-17, $1.6 billion more than in 2015-16. This was primarily due to transaction based asset recycling grants of $1.0 billion and a $720 million increase in national land transport grants. This increase was offset by a $435 million decrease in General Purpose Grants, which mainly comprises New South Wales’ share of the Goods and Services Tax (GST). 

Key revenues - a 6.7 per cent increase in total revenue from 2015-2016 to 2016-2017
There has been an increase in money collected from payroll tax, stamp duty, land tax, other taxes and gambling taxes from 2013 to now. This trend is expected to continue into 2021.

State Expenses

The State spent $79.4 billion in 2016-17 to deliver services to the community, an increase of $3.9 billion from 2015-16.

Overall expenses increased 5.2 per cent from last year. Most of the increase was due to higher employee costs and operating costs.

Total salaries and wages increased by 4.2 per cent from 2015-16.

Total salaries and wages increased to $30 billion from $28.8 billion in 2015-16. The Government wages policy aims to limit the growth in remuneration and other employee costs to no more than 2.5 per cent per annum.

Operating expenses increased by 12.4 per cent from 2015-16.

Within operating expenses, payments for supplies, services and other expenses increased, in part, due to the State:

  • reacquiring mining licenses worth $482 million and additional land remediation costs of $101 million

  • spending more on health including additional drug supplies relating to Hepatitis C.

State spend on transport and communications increased by 68.1 per cent since 2012-13.

While spending on health and education remain the largest functional areas provided by Government, expenditure on transport and communication increased, on average, by 13.9 per cent annually between 2012-13 and 2016-17. This increase reflects the Government’s investment in transport infrastructure such as the Sydney Metro and Westconnex. Over the same period, spending on health increased by $3.9 billion.

Expenditure on fuel and energy has decreased by an average of 44.7 per cent since 2012-13, reflecting the State’s leases of electricity network assets.

Key expenses- a 5.2 per cent increase in total expenses from 2015-2016 to 2016-2017
The following graph shows that Health has the most expenditure in 2016-17 with just over $20 billion. Expenses on social security, welfare, transport and communication, Education and Health have all continued to gradually increase over the last five years, with Fuel and Energy decreasing in spend.

In Focus: Restart NSW and Rebuilding NSW

In 2011, the Government established Restart NSW to fund high priority infrastructure projects.

Restart NSW projects are primarily funded from the proceeds from the asset recycling program enabling Government to deliver new infrastructure investment.

Restart NSW provides funding for the delivery of Rebuilding NSW, which is the Government’s 10-year plan to invest $20 billion in new infrastructure.

The State finalised long-term leases of Ausgrid and Endeavour Energy assets.

In June 2017, the Government finalised its long-term lease of 50.4 per cent of Endeavour Energy. This transaction follows on from the long-term leases of TransGrid in December 2015 and 50.4 per cent of Ausgrid in December 2016. Net proceeds of $15.0 billion were paid into Restart NSW relating to these transactions.

The Government also finalised an arrangement for the private sector to provide land titling and registry services to the public for 35 years. The State, through Restart NSW, received an upfront payment of $2.6 billion from the new operator.

Restart NSW is funding $29.8 billion of new infrastructure.

The Government has detailed its plan to invest $20 billion into the Rebuilding NSW plan from Restart NSW.

At 30 June 2017, around $2.9 billion has already been spent on Rebuilding NSW projects from Restart NSW, with a further $9 billion included in the budget aggregates. The Government has also earmarked a further $8.1 billion in Restart NSW for future projects.

The most significant project is the Sydney Metro. The Government has committed $7.0 billion from Restart NSW to build a 30-kilometre metro line, linking Sydney Metro Northwest at Chatswood, through new stations in the lower North Shore, the Sydney CBD and southwest to Bankstown. At 30 June 2017, $2.4 billion has been spent on this project from Restart NSW.

Other significant projects funded by Restart NSW include a $1.8 billion contribution to WestConnex and reserved funding of $1 billion towards the State’s Major Stadia Network program.

Total spend up to June 2017 was $6.8 billion. Total spend looks at spending as well as payments and proceeds.

To date, 19.2 per cent of payments from Restart NSW have gone to infrastructure projects in rural and regional areas.

Section 9 of the Restart NSW Fund Act 2011 requires the following information to be included in Restart NSW’s financial report:

  • total Fund payments for infrastructure projects in rural and regional areas outside metropolitan Sydney, Newcastle and Wollongong

  • whether the payments represent at least 30 per cent of total payments from the Fund for infrastructure projects.     

In 2016-17, 14 per cent of Restart NSW Fund payments were directed to infrastructure projects in rural and regional areas outside metropolitan Sydney, Newcastle and Wollongong. Over the past five years of the Restart NSW Fund to 30 June 2017, 19.2 per cent of payments were directed to these areas.

The 2017-18 budget papers include details on how the Government intends to use the Fund.

Asset recycling implications

The sale of government businesses can significantly impact State finances, including:

The General Government Sector has no Net Debt.

General Government Sector (GGS) Net Debt has decreased from around $14 billion in 2012 to negative $9 billion in 2017. This means the financial assets of the GGS now far exceed its financial liabilities. As the Government uses its financial assets on Restart NSW and Rebuilding NSW projects net debt is forecast to increase.

Revenue from dividends and income tax equivalents has reduced by 58.4 per cent since 2013.

The sale of some of the State’s income generating businesses means that income traditionally earned through sale of goods and services as well as the payment of dividends has reduced. Business’ that have been disposed collectively paid $3.1 billion of dividends and income tax equivalents over the past four financial years.

$298 million was spent on consultants to sell or lease State assets.

The State spent $175 million over the past 5 years on consultants for the electricity network and generator transactions. Other significant consulting costs include:

  • Ports transactions $71.6 million

  • Disability & Customer Care Services Transfers $31.1 million

  • Land & Property Information $14.8 million

  • Pillar $5.5 million       

Future asset transactions

Sale of WestConnex

The new M4-M5 link is expected to be partly funded by a planned sale of at least 51 per cent of Sydney Motorway Corporation (SMC), which is responsible with delivering WestConnex.

The State’s investment in SMC is $3.3 billion at 30 June 2017. It includes the concession deeds for the three components of WestConnex – the M4, the M5 and the new link between the two motorways.

The Government has launched a process with a call for parties to register their interest in the sale.

Sale of Snowy Hydro

The Commonwealth Government’s budget announced future plans to buy some or all of NSW’s 58 per cent stake in the Snowy Hydro power company as part of a major expansion of the historic scheme to include new forms of electricity generation.

The State’s investment in Snowy Hydro is $4.2 billion at 30 June 2017.

In Focus: Financial Management Transformation program

The Treasury initiated the Financial Management Transformation (FMT) program with the aim of changing and improving financial governance, budgeting and reporting arrangements of the New South Wales public sector.

FMT aims to deliver better outcomes for the people of New South Wales and focuses on transparency and accountability for expenditure, and better value for money.

New Financial Management System

PRIME is the Information Technology (IT) solution component of the FMT program, replacing several historical systems. PRIME will provide both financial and performance information within one IT platform for all agencies in the NSW public sector.

It is expected to give Government more timely information to plan and deliver its policy priorities and the budget.

Independent assurance over the budget process would improve confidence in the reliability of the State’s financial information.

Progress in 2017

The 2017-18 budget was prepared using the PRIME IT system.

The 2017-18 budget, tabled in June 2017, was the first budget generated using the new PRIME system.

The PRIME system continues to be released with five modules to be deployed by the end of November 2017.

The Treasury will spend $9.9 million in 2017-18 to:

  • modify PRIME for improvements identified by user agencies

  • increase PRIME’S ability to support new budget processes through strategic planning, data analytics and program reviews. 

Previously, the Audit Office provided independent assurance over the budget processes by being engaged to review the reasonableness of estimates and forecasts used by The Treasury in preparing the budget papers relating to the 2013-14 to 2016-17 budget years.

In 2017, the implementation of PRIME represented a major change to the budget process and accordingly, the Audit Office was not requested to undertake a review of the 2017-18 budget process.

Legislative reform

New legislation aims to establish a single framework for public sector financial management.

Progress in 2017

The Government is preparing draft legislation to replace a number of historical Acts.

The legislative reform proposes significant change to promote and support the performance, transparency and accountability of government financial agencies and government officials involved in financial management of the State.

We are supportive of the objects of the proposed reform, without weakening existing safeguards, and believe it is timely to also modernise audit provisions to support these objectives.

Given the increasing role of non-government agencies in the delivery of government programs, and the greater focus on meeting outcomes, we continue to advocate for ‘follow the dollar’ powers, now broadly available to other Australian audit offices.