State Finances 2020

Media release

The Auditor-General for New South Wales, Margaret Crawford, released her report today on State Finances for the year ended 30 June 2020.

‘I am pleased to once again report that I issued an unmodified audit opinion on the State’s consolidated financial statements,’ the Auditor-General said.

The report acknowledges this has been a challenging year, with New South Wales impacted by natural disasters and the COVID-19 pandemic.

The State’s Budget Result, reported in the financial statements, was a deficit of $6.9 billion. This is different to the 2019-20 budget forecast surplus of $1.0 billion and is an outcome of the government’s significant response to bushfires and COVID-19.

The report summarises a number of audit and accounting matters arising from the audit of the Total State Sector Accounts, a sector that comprises 291 entities controlled by the NSW Government with total assets of $495 billion and total liabilities of $256 billion.

Read full report (PDF)

Auditor-General's introduction

Pursuant to the Public Finance and Audit Act 1983, I present my report on State Finances 2020. I am pleased once again to report that I issued an unmodified audit opinion on the State’s consolidated financial statements.

This has been a year like no other for New South Wales. Impacted by extended drought, followed by bushfires, floods and then by the COVID-19 pandemic, the State’s final position reflected in the financial statements is significantly different to the budget forecast. The 2019–20 budget forecast a surplus of $1.0 billion. The Budget Result was a deficit of $6.9 billion.

This change was the result of the government’s deliberate and substantial response, particularly to bushfires and COVID-19. The response included additional funding for Health and other emergency responders for additional staff, cleaning and protective equipment, along with urgent grants and tax relief to support businesses.

Major adjustments were also made to the way government agencies operated. From early March 2020, most public servants were working from home. Treasury responded by providing an extension of time for the completion of financial reporting. I want to acknowledge the enormous efforts agencies made to complete their financial reporting obligations in such challenging circumstances, made more complex by changed accounting standards and the implementation of earlier machinery of government changes.

The challenges confronting New South Wales this year will require ongoing attention through targeted agency programs and budget initiatives over a number of years. As the State’s independent auditor, my work program will continue to have a focus on both the level of spending and the effectiveness of the government’s emergency response.

In conclusion, could I thank Treasury staff for the way they have engaged with my Office in the conduct of our audit in this unprecedented year. Our partnership remains critical to ensure transparency of government activities and the quality of financial management and reporting in New South Wales.

 

Margaret Crawford
Auditor-General for New South Wales

 

The Audit Office of New South Wales acknowledges the Traditional Owners and Custodians of the land in which we live and work. We pay our respects to Elders past and present.

Audit result

Our audit opinion on the State’s 2019–20 financial statements was unmodified

An unmodified audit opinion was issued on the State’s 2019–20 consolidated financial statements.

The State extended signing its financial statements by six weeks.

Natural disasters, the COVID-19 pandemic and other factors impacted the State’s 2019–20 reporting timetable. The State extended signing its financial statements by six weeks, compared with 2018–19.

All agencies were also given a two-week extension to prepare their financial statements compared with 2018–19. Further extensions beyond two weeks were subsequently approved for the following 11 agencies (7 in 2018–19) to submit completed financial statements for audit:

  • Department of Communities and Justice
  • Department of Customer Service
  • Department of Planning, Industry and Environment
  • Department of Regional NSW
  • Department of Transport
  • Environment Protection Authority
  • Infrastructure NSW
  • Lord Howe Island Board
  • NSW Crown Holiday Parks Land Manager
  • Service NSW
  • Water Administration Ministerial Corporation.

The extensions reflected that the COVID-19 pandemic impacted agencies’ work environments during the first six months of 2020. This was at a time when many were still implementing machinery of government changes and preparing to implement three significant new accounting standards:

  • AASB 15 Revenue from Contracts with Customers (issued December 2014, effective 1 July 2019)
  • AASB 16 Leases (issued February 2016, effective 1 July 2019)
  • AASB 1058 Income of Not-for-profit entities (issued December 2016, effective 1 July 2019).

These new accounting standards were issued some years before they became effective, to allow reporting entities sufficient time to prepare for implementation. Notwithstanding this, some agencies had not fully implemented the new accounting standards in time for early close procedures, and the unforeseen impact of COVID-19 further complicated the year-end financial reporting processes for the State and its agencies.

The graph below shows the number of reported errors exceeding $20 million over the past five years in agencies’ financial statements presented for audit.

In 2019–20, agency financial statements presented for audit contained 19 errors exceeding $20 million (six in 2018–19). The total value of these errors increased to $1.4 billion ($927 million in 2018–19).

The errors resulted from:

  • incorrectly applying Australian Accounting Standards and Treasury Policies
  • incorrect judgements and assumptions when valuing noncurrent physical assets and liabilities
  • incorrectly interpreting the accounting treatment for unspent stimulus funding.

Errors in agency financial statements exceeding $20m (2016–2020)

Early close procedures, performed at 31 March each year, are designed to help agencies improve the quality and timeliness of financial reporting by facilitating early identification, discussion and resolution of key accounting issues. Agencies could have better utilised early close this year, particularly when it came to implementing the new accounting standards. This would have reduced the number of reported errors and improved timeliness of agencies submitting financial statements.

Response to COVID-19 and bushfires

$4.1 billion in stimulus funding was allocated in 2019–20

The government implemented an economic stimulus package primarily to mitigate the impacts of the COVID-19 pandemic on New South Wales.

The COVID-19 pandemic and bushfires had a significant impact on the State’s finances, reducing its revenue and increasing its expenses especially in sectors directly responsible for responding to the COVID-19 pandemic, such as Health.

The government announced a $4.1 billion health and economic stimulus package in 2019–20. This primarily included:

  • $2.2 billion in health measures including purchases of essential medical equipment and increasing clinical health capacity (like intensive care spaces)
  • $1.0 billion in small business and land tax relief
  • $355 million in extra cleaning services and quarantine costs.

Cluster agencies had spent $3.0 billion (just under 75 per cent) of the COVID-19 stimulus package by 30 June 2020.

The Health cluster incurred most of this expenditure.

Total spend relating to bushfires was $1.3 billion in 2019–20.

The graph below shows the total allocation and spend by cluster to 30 June 2020.

Economic stimulus allocation and spend by cluster to 30 June 2020

The Health cluster was allocated $1.3 billion for personal protective equipment.

Around $1.3 billion (just over 30 per cent) of the total stimulus package was allocated to Health cluster agencies for purchases of safety equipment, such as personal protective equipment (PPE). By 30 June 2020, $1.1 billion had been spent on PPE.

The graph below shows the total allocation and spend by major category as part of the overall stimulus package.

Allocation and spend by stimulus to 30 June 2020

Responses to COVID-19 and bushfires were funded by $1.6 billion in grants from the Australian Government, and $2.7 billion in State borrowings.

At 30 June 2020, COVID-19 stimulus and bushfire funding provided by the State to cluster agencies included $1.6 billion from the Australian Government and $2.7 billion in new borrowings by the State from bonds issued through New South Wales Treasury Corporation (TCorp). The proceeds from these bond issues were provided as loans largely to the Crown Entity, which was responsible for allocating stimulus funding to cluster agencies.

The capital stimulus spend was mainly directed to transport for critical renewal projects, and large scale hospital capital works. Other stimulus included spending on homelessness support, grants to rebuild fences for bushfire affected farmers, local government, community and pre-school contributions.

Most stimulus funding was provided via ‘Exigencies of Government’ measures under Section 4.13 of the Government Sector Finance Act 2018 (GSF Act). This allows funding for urgent and unforeseen expenditures such as natural disasters. Funding was also provided to cluster agencies through the Treasurer’s State Contingency Account (section 4.12 of the GSF Act). The 2019–20 State budget included a $120 million appropriation to the Treasurer for any State contingencies during the year.

General Government Sector Budget Result

Deficit of $6.9 billion compared with a budgeted surplus of $1.0 billion

An outcome of the government’s overall activity and policies is its net operating balance (Budget Result). This is the difference between the cost of general government service delivery and the revenue earned to fund these sectors.

The General Government Sector, which comprises 199 entities, generally provides goods and services funded centrally by the State.

The Non-General Government Sector, which comprises 92 government businesses, generally provides goods and services, such as water, electricity and financial services that consumers pay for directly.

The Budget Result for the 2019–20 financial year was a deficit of $6.9 billion. The original budget forecast, set before the COVID-19 pandemic and bushfires, was a $1.0 billion surplus. The main driver of the change in result was:

  • $1.3 billion of higher employee costs, mainly due to:
    • increased workers compensation claims
    • additional personnel required (mainly in the Health sector) to respond to the COVID-19 pandemic
  • $2.3 billion of higher operating expenses, mainly due to:
    • $828 million from first time recognition of a child abuse claim liability
    • $507 million from additional insurance claims from the NSW bushfires
    • $343 million from COVID-19 claims by agencies for loss of revenue.
  • $1.8 billion in higher grants and subsidy expenses, mainly due to:
    • small business grants
    • COVID-19 quarantine compliance measures
    • costs incurred in response to the 2019–20 bushfires, drought and disaster relief payments
    • third party-controlled assets that were subsequently transferred to councils and utility providers, mainly arising from construction of the CBD and South East Light Rail.

The deficit was further driven by:

  • $1.9 billion less taxation revenue, mainly resulting from:
    • $1.3 billion less in payroll tax due to relief measures introduced by the government as part of its COVID-19 economic stimulus
    • $424 million less in gambling and betting taxes, due to venue closures required by COVID-19 public health orders
  • $523 million less in dividends and income tax revenue from the Non-General Government Sector, due to lower dividends received from NSW Treasury Corporation and from the State’s other commercial government businesses
  • lower fines, regulatory fees and other revenue, due to a $305 million decrease in mining royalties, largely driven by lower coal prices.

Main drivers of the 2019–20 actual vs. budget variance

Original 2019–20 budget   Actual 2019–20 budget result

$1.0b

Surplus

 

$6.9b

Deficit

Key audit findings

Accounting matters

$828 million of unreported abuse claims estimated for the first time

In its 2019–20 financial statements, NSW Self Insurance Corporation (SiCorp), an agency operated and managed by Insurance and Care NSW (icare), recorded for the first time an $828 million liability for unreported past incidences of abuse claims that occurred within NSW Government institutions. The liability was impacted by legislative changes in response to recommendations from the Royal Commission into Institutional Responses to Child Sexual Abuse.

In the past SiCorp could not reliably measure the liability because of weaknesses in icare’s claims data quality and uncertainties arising from legislative changes at the time. In 2019–20, SiCorp had:

  • improved the quality of its claims data
  • gained twelve more months of claims experience
  • benchmarked its claims experience against other jurisdictions.

NSW Self Insurance Corporation

NSW Self Insurance Corporation (SiCorp), an agency operated and managed by icare, operates ten government managed fund schemes. The largest of these, the Treasury Managed Fund (TMF), provides self-insurance coverage for public sector workers compensation and public liability claims.

Insurance and Care NSW (icare) provides leadership, management and corporate services to SiCorp for a fee. Further commentary on the financial performance of SiCorp and other agencies managed by icare, will be included in our Central Agencies 2020 Report to Parliament.

In 2019–20, SiCorp reported a:

  • $2.8 billion underwriting loss ($1.4 billion loss in 2018–19)
  • $126 million overall net asset deficiency as at 30 June 2020 ($618 million net asset surplus at 30 June 2019).

SiCorp’s financial statements disclose an underwriting result and net result, representing the combined performance of all ten schemes. The underwriting result represents SiCorp’s performance from insurance (and insurance like) activities, while the net result represents the underwriting result plus non-insurance related income and expenses.

The 2019–20 underwriting loss was impacted by a $2.5 billion increase in outstanding claims liabilities, increasing claim liabilities to $12.2 billion at 30 June 2020 ($9.7 billion liability at 30 June 2019). Most of the underwriting loss, and outstanding claims increase, related to the TMF and Pre-Management Fund (PMF) schemes. The PMF funds claims incurred by the NSW Government before 1 July 1989.

The overall claims liability increased by:

  • $862 million for abuse claims, of which $828 million is due to the first-time recognition of a provision for unreported claims from past incidences of abuse that occurred in NSW government institutions
  • $507 million for 2019–20 bushfire claims, excluding claims handling expenses and net of recoveries
  • $551 million increase in workers compensation claims largely from cost increases for certain claim types
  • $343 million for COVID-19 costs, such as business interruption claims.

SiCorp’s overall net asset deficiency was due to unfunded liabilities of $746 million within the Home Building Compensation Fund (HBCF), and $599 million of this relates to policies issued before 1 July 2018. While the net asset deficiency means that the HBCF scheme is not fully funded for all expected future payments, NSW Treasury has guaranteed to fund cash shortfalls for policies written before 1 July 2018. HBCF is not caught by the Net Asset Holding Level Policy (NAHLP) referred to below.

Notwithstanding the overall net asset deficiency, SiCorp’s financial statements were prepared on a going concern basis. This is because future payment obligations are generally long term and not all due within the next 12 months. Settlement is instead expected to occur over years into the future, depending on the nature of the benefits provided by each scheme.

SiCorp also received grant income of $2.0 billion from the consolidated fund ($1.2 billion in 2018–19) to ensure its ratio of financial assets to liabilities for certain schemes remained within the NAHLP target range. If not for this grant income, the TMF and PMF schemes would have had significant net asset deficiencies.

The NAHLP, agreed between SiCorp and NSW Treasury, requires SiCorp to maintain financial assets for certain schemes, including TMF and PMF, at between 105 and 115 per cent of its liabilities.

CBD and South East Light Rail

The CBD and South East Light Rail is a twelve kilometre light rail network for Sydney. All stages became operational in 2019–20. Stage one, Randwick to Circular Quay, opened to the public on 14 December 2019. Stage two, Randwick to Kingsford, opened to the public on 3 April 2020.

In June 2020 the Audit Office tabled a follow-up performance audit report on the CBD South East Sydney Light Rail project. This report assessed whether Transport for NSW had updated and consolidated information about project costs and benefits.

The audit found that Transport for NSW had not accurately updated project costs, limiting the transparency of reporting to the public.

The performance audit report noted that as at March 2020 the total cost of the project would exceed $3.1 billion, which was above the revised costs of $2.1 billion in December 2014 and $2.9 billion in November 2019. The original estimated cost was $1.6 billion in the November 2013 business case. At March 2020, Transport for NSW was still in the process of finalising the total cost of the project. As part of this process Transport for NSW identified and reported further costs of $180 million in relation to the construction of the CBD and South East Light Rail bringing the total cost of the project at 30 June 2020 to $3.3 billion.

This total project cost includes $54.3 million paid during construction as part of a Small Business Assistance Program. This program was established to help small businesses on the light rail route that were impacted by delays in construction.

The report recommended that Transport for NSW publicly report on four areas: final project cost, updated expected project benefits, benefits achieved in the first year of operation, and average weekly journey times.

At 30 June 2020, the total cost of the project related to the CBD and South East Light Rail was $3.3 billion. Of this, $2.6 billion was recorded as assets. The following was expensed or written off:

  • $355 million relating to third party assets transferred to councils and utility providers as Transport for NSW do not control these assets
  • $345 million in fair value and impairment adjustments.

Transport Asset Holding Entity (TAHE)

TAHE’s operating model and corporate intent has not been created despite government plans to operate from 1 July 2019.

Prior to 1 July 2015, the government paid grants to Rail Corporation (RailCorp) to deliver its capital program. These grant payments were recorded as an expense to the budget. From 1 July 2015, funding for RailCorp’s capital projects was provided by equity injections which from that point are no longer recorded as an expense to the budget. The change, as explained in the 2015–16 State Budget, was due to the expectation that RailCorp will transition to a Transport Asset Holding Entity (TAHE), over time providing a commercial return. That Budget also highlighted how the accounting change improves the General Government Sectors’ budget result each year, typically by as much as $1.2 billion to $1.9 billion. The basis for the change in accounting treatment in the budget was predicated on TAHE being commercially operational from 2019.

A plan was established by NSW Treasury to transition RailCorp to TAHE. This plan extended over a four year period, from 1 July 2015 to 1 July 2019, the latter date representing when TAHE was expected to be fully operational as owner of all NSW public sector transport assets.

The plan recognised that establishment and implementation of TAHE required some lead time given the need to draft legislation, develop the full commercial model and appoint a governing board.

Enactment of the Transport Administration Act created TAHE on 1 July 2020, twelve months after its originally planned operational date. A large portion of the planned arrangements have not been implemented. On 1 July 2020, TAHE became responsible for the same activities as RailCorp, with a newly appointed TAHE board and executive management team.

At the time of concluding our audit, the TAHE operating model and Statement of Corporate Intent (SCI) were not finalised. While State owned corporations are required to submit a SCI three months after the commencement of each financial year, TAHE received an extension from its shareholders, the Treasurer and Minister for Finance and Small Business and will submit their first SCI by 31 December 2020. TAHE has not established commercial arrangements with rail operators, Sydney Trains and NSW Trains to provide them access to the rail network and heavy rail assets. In accordance with the original plan, interim commercial access arrangements were supposed to be in place with RailCorp prior to the commencement of TAHE. However, current legacy arrangements from RailCorp have transitioned to TAHE, and no access fees are paid by these rail operators. Maintenance expenses to the TAHE rail network continue to be paid by the rail operators.

Finalisation of these arrangements, the accounting for further cash injections and the fair value of TAHE’s assets will be a key area of audit focus in 2020–21.

Further commentary on TAHE will be included in the AuditorGeneral’s Transport 2020 Report to Parliament.

Crown Land Managers

Certain Crown Land Managers exempted from preparing financial statements.

The Public Finance and Audit Act 1983, requires state-controlled Crown Land Managers (CLM) to prepare annual reports. Currently 637 CLM’s do not prepare financial statements for audit. Most CLMs (other than the Cemetery Trusts) do not control significant assets and many are administered by volunteers.

During 2019–20, NSW Treasury established reporting exemption criteria for the CLMs as outlined in Schedule 2 to the Public Finance and Audit Regulation 2015.

Of the 637 CLM’s:

  • 347 have not submitted their 2018–19 annual report. This means reporting exemption assessments for these CLMs is yet to be completed
  • 290 have submitted a 2018–19 annual report. Of these, 31 did not meet exemption requirements and will be required to submit financial statements for audit.

NSW Treasury has extended the deadline by four months to 28 February 2021:

  • for the 31 CLMs that did not meet the reporting exemption criteria to submit 2019–20 financial statements
  • for reporting exemption assessments to be completed for the remaining 347 CLMs that did not submit a 2018–19 annual report.

Three cemetery CLM’s continue to maintain they are not controlled by the State. These are the Northern Metropolitan, Southern Metropolitan and Catholic cemetery trusts.

Consequently, their financial statements have not been provided to the Audit Office for audit. These CLM’s shared their unaudited financial statements with NSW Treasury so they could be incorporated into the State’s financial statements. At 30 June 2020, the unaudited value of their combined assets and liabilities was $561 million.

Accounting for the State’s leases under the new accounting standard AASB 16: Leases

NSW Government agencies implemented a new accounting standard, AASB 16 Leases, on 1 July 2019. This resulted in the State recognising $9.3 billion in right of use leased assets (ROU assets) and $9.8 billion in liabilities for the related future lease payments in 2019–20.

Property NSW implemented a new lease accounting system, managing most of the State’s property lease arrangements with external parties and inter-agency lease arrangements. Property NSW is also tasked with calculating the value of ROU assets and related liabilities for leases it manages on behalf of the State, and leases between government agencies.

The State’s financial statements submitted for audit contained net errors of $50.5 million related to the new lease accounting treatments required under AASB 16.

The errors were due to control weaknesses identified in the system used to manage leases and in Property NSW’s calculations, including:

  • inaccurate data entered in the new lease accounting system
  • no evidence that lease agreement information was independently reviewed
  • incorrect interpretation and accounting treatment of rent payment and review clauses
  • gaps in information system user access management controls.

Control weaknesses also impacted the calculated ROU assets and liability values reported in agency financial statements. Agencies were required to perform additional procedures to ensure the lease values determined by Property NSW were accurate. Further detail on lease errors identified in agency financial statement’s will be reported in the Auditor-General’s 2020 cluster reports to Parliament.

Property NSW and relevant government agencies need to ensure the accuracy of all relevant lease contract data in the system, including future market rent reviews, fixed rate increases, nonlease components and lease incentives. This will help ensure ROU asset and liability values are correctly calculated and reported in the State’s financial statements and across a large number of agency financial statements.

Unspent stimulus funds

Four agencies incorrectly accounted for unspent stimulus funding received from the State. These were NSW Treasury, Department of Education, Department of Customer Service and Ministry of Health. Collectively $74 million was not reported as liabilities for unspent appropriations as at 30 June 2020. Those errors were subsequently corrected. The State’s accounting policy, TPP20-05 ‘Agency Direction for the 2019–20 Mandatory Annual Returns to Treasury’, requires agencies that received direct appropriations from the Consolidated Fund to report unspent funds as liabilities in their year-end financial statements. Stimulus and exigency funds are classified as appropriations under section 4.12 and 4.13 of the Government Sector Finance Act 2018. The State allocated $4.1 billion in stimulus and exigency funding from the Consolidated Fund to mitigate the economic impacts of COVID-19 in 2019–20.

 

Correction of prior years errors

Prior year error of $1.1 billion in road infrastructure asset values

The former Roads and Maritime Services (RMS) corrected an error in the value of its 2018–19 road infrastructure assets by $1.1 billion, from $95.6 billion to $94.5 billion.

On 1 December 2019, RMS transferred its assets, rights, liabilities and functions to Transport for NSW. RMS prepared its last financial statements as a separate entity at 30 November 2019, including a $1.1 billion correction of prior period errors.

The prior period errors were recorded in both the RMS and TSSA 2019–20 financial statements and comprised overstatements of $290 million and $812 million in valuations of culvert assets (stormwater drainage products) and retaining walls respectively. The overstatements were due to double counting assets or use of unreliable data when determining asset fair values in prior years. 

 

Prior year error of $421 million in the valuation of stadium assets

Sydney Olympic Park Authority (SOPA) restated the value of its assets to correctly reflect the fair value of ANZ Stadium.

In 2019–20, SOPA re-evaluated the accounting treatment of its interest in ANZ Stadium. Previously, SOPA reported a $437 million interest in the stadium. This interest represents the right to receive the stadium from the operator Venues NSW, in thirteen years.

This year, SOPA determined it controlled the stadium as it can direct the use of the stadium, despite being operated by Venues NSW. To reflect this position, SOPA recognised the entire fair value of the stadium in its financial statements. This increased the value of its assets by $421 million to $858 million. The State’s financial statements already recognised the full fair value of the stadium. The restated value reflects arrangements that should have been in place since the State bought back the rights to operate ANZ Stadium from the private sector on 1 July 2016.

 

Thomas Walker Convalescent Hospital, valued at $50.5 million, transferred to correct entity

The Thomas Walker Convalescent Hospital was historically included as an asset in the NSW Health Foundation (the Foundation) financial statements. The Walker Trusts Act 1938, provides that the Royal Prince Alfred Hospital, part of Sydney Local Health District (Sydney LHD), has overall control, management and administration of the Thomas Walker Estate. Both the Foundation and Sydney LHD determined that, as a consequence, the LHD controlled the Thomas Walker Convalescent Hospital and it should be recorded in Sydney LHD’s financial statements. The Hospital value was subsequently recognised by Sydney LHD, increasing the value of its land and buildings and decreasing those of the Foundation by $50.5 million.

 

The State's revenues

Revenues increased $209 million to $86.3 billion

In 2019–20, the State’s total revenues increased by $209 million to $86.3 billion, 0.2 per cent higher than in 2018–19. COVID-19 impacted taxation revenue, which fell by $1.1 billion and revenue from the sale of goods and services, which fell by $1.1 billion. These falls were offset by a $2.5 billion (7.7 per cent) increase in grants and subsidies from the Australian Government, mainly in the form of additional stimulus funding.

Taxation revenue fell 3.5 per cent

Taxation revenue fell by $1.1 billion, mainly due to a:

  • $861 million fall in payroll tax as a result of COVID-19 relief (reduced payroll tax payments for eligible small businesses)
  • $430 million fall in stamp duty collections, driven by lower than expected growth in the property market
  • $427 million decline in gambling and betting taxes, mainly due to venue closures driven by COVID-19 public health orders.

Stamp duties of $8.8 billion were the largest source of taxation revenue, $473 million higher than payroll tax, the second-largest source of taxation revenue.

Australian Government grants and subsidies

The State received $34.2 billion in grants and subsides which are mainly from the Australian Government, $2.4 billion more than in 2018–19.

The increase was driven by a $1.1 billion increase in Commonwealth Specific Purpose Payments to support the Health cluster respond to the COVID-19 pandemic. Commonwealth National Partnership Payments increased by a similar amount to provide the State with Natural Disaster relief.

Sales of goods and services

In 2019–20, sales of goods and services fell $1.1 billion. This was due to the COVID-19 pandemic reducing:

  • patronage and related transport passenger revenue
  • health billing activities with elective surgery being put on hold
Fines, regulatory fees and other revenues

Fines, regulatory fees and other revenues fell $505 million. This was mainly due to a $409 million decrease in mining royalties attributed to a drop in thermal coal prices during 2019–20.

Other dividends and distributions

Other dividends and distributions rose by $616 million due to higher distributions received from the State’s investments. This was due to an additional $1.3 billion held in the State’s investment portfolio compared with last year.

Trends in tax collection

SOURCE: 2013 – 2020: Tax collection balances (audited).
1 Other taxes mainly includes: motor vehicle taxes, fire levy, emergency services levy, and waste disposal levy.

The State’s expenses

Expenses increased $8.2 billion to $96.0 billion

The State’s expenses increased 9.3 per cent compared with 2018–19. Most of the increase was due to higher employee expenses, other operating costs and grants and subsidies.

Employee expenses, including superannuation, increased 5.7 per cent to $42.6 billion.

Salaries and wages increased to $42.6 billion from $40.3 billion in 2018–19. This was mainly due to increases in staff numbers and a 2.5 per cent increase in pay rates across the sector. Salaries and wages for the Education and Health sectors increased by $659 million and $732 million in each sector respectively.

The Health sector employed an additional 2,763 full time staff in 2019–20. It also incurred more overtime in response to COVID-19. Education increased staff numbers by 4,866 full time equivalents and paid a one off 11 per cent pay rise to school administration staff in 2019–20. Historically, the government wages policy aims to limit growth in employee remuneration and other employee related costs to no more than 2.5 per cent per annum.

Operating expenses increased 8.7 per cent to $27.0 billion.

Operating expenses increased to $27.0 billion in 2019–20 ($24.8 billion in 2018–19) due to higher operating activities in Health. The higher level of activities and related costs is attributed to a full year of operations at the Northern Beaches Hospital (opened November 2018), and responding to COVID-19. The response to COVID-19 involved the State providing viability payments to private hospitals, higher visiting medical officer costs due to additional overtime hours and spending more on equipment to set up COVID-19 testing clinics.

Insurance claims increased by $2.0 billion. This was mainly due to NSW Self Insurance Corporation (SiCorp) recognising a liability for child abuse claims incurred but not reported for the first time, and claims for the 2019–20 bushfires, floods and COVID-19.

Health costs remain the State’s highest expense.

Total expenses of the State were $96 billion ($87.8 billion in 2018–19). Traditionally, the following clusters have the highest expenses as a percentage of total government expenses:

  • Health – 24.3 per cent (25.8 per cent in 2018–19)
  • Education – 17.6 per cent (19.3 per cent in 2018–19)
  • Transport - 12.8 per cent (12.6 per cent in 2018–19).

General public service expenses as a percentage of total State expenses is higher due to a $2.0 billion increase in SiCorp’s accrued claim expenses.

Other expenses increased due to additional grant funding by the State for drought relief and COVID-19 stimulus spend.

Health expenses increased by $632 million compared with 2018–19 but fell as a proportion of total State expenses.

Education expenses remained stable compared with last year due to savings in student transportation costs primarily driven by COVID-19. This led to a decrease in the proportion of the State’s costs relating to education activities.

Grants and subsidies increased $2.5 billion to $14.1 billion.

The increase in grants and subsidies was due to payments the State made to support businesses and local communities in the face of COVID-19 and bushfires. In addition, the State transferred CBD and South East Light Rail assets to councils and utility providers during 2019–20 as it no longer controlled these.

Depreciation expense increased $1.0 billion to $9.2 billion.

Depreciation increased to $9.2 billion from $8.0 billion in 2018–19. At 1 July 2019, the State implemented the new leases standard recognising a right of use (ROU) asset and related lease liability in its financial statements. The value of ROU assets are amortised over the term of the lease. This contributed to $980 million of the increase in 2019–20 depreciation expense. Last year, these costs were previously reported within other operating expenses.

Expenses by function

1 General Public Services relates to executive and legislative functions, financial and fiscal affairs of the State.
2 Other mainly relates to economic affairs, housing and community, recreation and culture functions of the State.

The State's assets

Assets grew by $28.0 billion to $495 billion

The State’s assets primarily include physical assets such as land, buildings and infrastructure, and financial assets such as cash, and other financial instruments and equity investments. The value of total assets increased by $28.0 billion to $495 billion. This was a six per cent increase compared with 2018–19, mostly due to changes in asset carrying values.

Of the State’s $28.0 billion increase in asset values, $9.3 billion was due to a new accounting standard requirement for operating leases to be valued and recorded on balance sheet for the first time.

AASB 16 Leases requires entities recognise values for right-ofuse assets (ROU) for the first time. An ROU asset is a lessee’s right to use an asset, the value of which is amortised over the term of the lease. This standard came into effect from 1 July 2019.

Valuing the State’s physical assets

State’s physical assets valued at $365 billion.

The value of the State’s physical assets increased by $14.1 billion to $365 billion in 2019–20. The assets include land and buildings ($168 billion), infrastructure ($180 billion) and plant and equipment ($16.7 billion). A prior period error relating to the valuation of RMS infrastructure assets reduced the reported values by $1.0 billion from $352 billion to $351 billion at 30 June 2019.

The movement in physical asset values between years includes additions, disposals, depreciation and valuation adjustments. Other movements include reclassification of physical assets leased under finance leases to right of use assets upon adoption of AASB 16 Leases on 1 July 2019.

Movements in physical asset values

In 2019–20, asset additions totalled $22.3 billion ($22 billion in 2018–19), due to the following capital projects:

  • Roads and Maritime Services: $2.8 billion (including Westconnex Rozelle interchange and Pacific Highway upgrade)
  • Sydney Metro: $2.3 billion (including Sydney Metro City and Southwest Light Rail)
  • Health: $2.3 billion (including redevelopments of Campbelltown, Westmead and Nepean hospitals)
  • RailCorp: $1.9 billion (including Central Walk Project and New Intercity Fleet purchase)
  • Education: $2.1 billion (including Arthur Phillip High School, Parramatta Public School, new Oran Park High School and Armidale Secondary College upgrade).

Asset revaluations added $4.5 billion to physical asset values. This was mainly driven by a:

  • $2.0 billion increase in the valuation of RMS’ infrastructure assets
  • $1.8 billion increase in the valuation of RailCorp’s trackwork infrastructure and a $0.5 billion relating to buildings

The top four asset construction projects funded by the State in 2019–20 include:

  • Sydney Metro City and Southwest ($1.7 billion)
  • Pacific Highway upgrade Woolgoolga to Ballina ($980 million)
  • Prince of Wales Randwick campus Stage 1 ($720 million)
  • Campbelltown Hospital Stage 2 ($632 million).

Several major capital projects were completed in 2019–20, including:

  • CBD and South East Light Rail ($3.3 billion)
  • Gosford Hospital Redevelopment ($348 million)
  • New and upgraded schools, including:
    • Arthur Phillip High School ($109 million)
    • Oran Park High School ($57 million)
    • Ultimo Public School ($31 million).

Valuing the State’s financial assets

State’s financial assets valued at $104 billion.

The value of financial assets increased by $2.8 billion to $104 billion at 30 June 2020. Over the year:

  • receivables increased by $3.6 billion largely due to a $2.9 billion increase in taxation revenue accrued at 30 June 2020. The new revenue standard allows income received after year end to be recognised at year end if it relates to taxable events arising during the financial year
  • financial assets held at market value increased by $1.3 billion largely due to lower than expected economic stimulus spend in 2019–20.
  • cash increased by $1.7 billion due to additional borrowings by the State in response to COVID-19 stimulus measures and planned infrastructure yet to be spent.

These increases were partially offset by a $2.7 billion reduction in other equity investments, reflecting the adverse conditions in equity markets as a result of the COVID-19 pandemic.

The State’s liabilities

Liabilities increased $38.4 billion to $256 billion

The State borrowed additional funds in response to natural disasters and COVID-19.

The State’s borrowings rose by $33.9 billion to $113.8 billion at 30 June 2020. This accounted for most of the increase in the State’s total liabilities.

The value of TCorp bonds on issue increased by $25.2 billion to $97.0 billion to largely fund capital expenditure and costs associated with the bushfires, drought and COVID-19.

TCorp bonds are actively traded in financial markets and are guaranteed by the NSW Government.

Over 2019–20, TCorp continued to take advantage of lower interest rates, buying back short-term bonds and replacing them with longer dated debt. This lengthens the portfolio matching liabilities with the funding requirements for infrastructure assets.

With effect from 1 July 2019, AASB 16 Leases required the State to recognise liabilities for operating leases for the first time. This increased total lease liabilities from $5.3 billion at 30 June 2019 to $11.8 billion at 30 June 2020.

More than a third of the State’s liabilities relate to its employees. They include unfunded superannuation and employee benefits, such as long service and recreation leave.

Valuing these obligations involves complex estimation techniques and significant judgements. Small changes in assumptions and other variables, such as a lower discount rate, can materially impact the valuation of liability balances in the financial statements.

The State’s unfunded superannuation liability rose $300 million from $70.7 billion to $71.0 billion at 30 June 2020. This was mainly due to a lower discount rate of 0.87 per cent (1.32 per cent in 2018–19). The State’s unfunded superannuation liability represents the value of its obligations to past and present employees less the value of assets set aside to fund those obligations.

 

Trend in unfunded superannuation liability

Fiscal responsibility

The State maintained its AAA credit rating

The object of the Fiscal Responsibility Act 2012 is to maintain the State’s AAA credit rating.

The government manages New South Wales’ finances in accordance with the Fiscal Responsibility Act 2012 (the Act).

The Act establishes the framework for fiscal responsibility and the strategy to maintain the State’s AAA credit rating and service delivery to the people of New South Wales.

The legislation sets out targets and principles for financial management to achieve this.

This year, the State’s credit rating from Standard & Poor’s changed from AAA/Stable to AAA/Negative. Moody’s Investors Service credit rating of Aaa/Stable did not change from the previous year.

The fiscal target for achieving this objective is that General Government annual expenditure growth should be lower than long term average revenue growth.

The State did not achieve its fiscal target of maintaining annual expenditure growth below the long-term revenue growth rate target of 5.6 per cent.

In 2019–20, General Government expenditure grew by 9.7 per cent (5.5 per cent in 2018–19).

Expenditure items that contributed most to the growth rate include:

  • recurrent grants and subsidies (20.4 per cent)
  • other operating expenses (9.5 per cent)
  • employee costs (including superannuation) (5.6 per cent)

Recurrent grant and subsidy expenses increased by $2.8 billion in 2019–20 mainly due to the COVID-19 and natural disaster payments. Other operating expenses increased mainly due to a $2.0 billion increase in SiCorp insurance claims. This included the $828 million provision for child abuse claims incurred but not reported. The bushfires and COVID-19 pandemic also increased the number and cost of claims in 2019–20.

Superannuation funding position since inception of the Act - AASB 1056 Valuation

Eliminating unfunded superannuation liabilities by 2030.

The Act sets a target to eliminate unfunded superannuation liabilities by 2030.

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 2019–20, the State made employer contributions of $1.81 billion ($1.73 billion in 2018–19), an increase of $76 million or 4.4 per cent ($64 million or 3.8 per cent in 2018–19). This was $10.7 million lower than the 5.0 per cent target. Employer contributions have not met the 5.0 per cent escalation target each year since 2015–16.

For fiscal responsibility purposes, the State uses AASB 1056: Superannuation Entities. Under this accounting standard, the State’s unfunded superannuation liability was $14.9 billion at 30 June 2020 ($13.2 billion).

The State’s financial statements record an unfunded superannuation liability of $71.0 billion at 30 June 2020.

For financial statement purposes, the State has to use AASB 119 Employee Benefits to calculate the value of its unfunded superannuation liability. The difference in the value of the liability calculated under AASB 1056 of $14.9 billion and that calculated under AASB 119 of $71 billion arises because the two standards use different bases to measure the liability.

AASB 119 requires entities to discount employee liabilities (including unfunded superannuation) using the more volatile long term Australian Government bond rate, while AASB 1056 discounts the liability using the less volatile long-term expected rate of return from the assets backing the liability, currently 5.0 to 7.0 per cent.

AASB 119 produces a higher liability because of the current low interest rate environment and the impact this has on discount rates.

  As recorded in the State’s financial statements Fiscal reporting and as reported in superannuation entities’ financial statements
 
AASB 119 Employee Benefits
AASB 1056 Superannuation Entities
Purpose Financial statements for employer Financial statements of superannuation funds
State’s superannuation unfunded liability ($billion) 71.0 14.9
Discount rate (%) 0.87 5.0 – 7.0
Discount rate used Government bond rate Expected return on assets backing the liability

 

In focus

GSF Act and COVID-19 legislative amendments

NSW Treasury should improve the guidance it provides to agencies to improve the sector’s understanding, interpretation and application of the Government Sector Finance Act 2018 (GSF Act).

Last year, the Audit Office reported on key risks and challenges associated with implementing the GSF Act, including:

  • building awareness of the impact of the new reforms
  • assessing internal control environments for alignment with GSF Act principles
  • reviewing expenditure processes (including financial delegations)
  • preparing for the new legislative financial and performance reporting framework.

Our audit of agencies’ 2019–20 financial statements identified that more work is required by NSW Treasury and the agencies to address the key risks and challenges we highlighted last year.

Government agencies did not understand or correctly apply the requirements of the GSF Act, resulting in non-compliance with the Act.

This year’s audits identified that some agencies:

  • spent deemed appropriations without obtaining an authorised delegation from the relevant minister(s), as required by sections 4.6(1) and 5.5(3) of the GSF Act
  • did not disclose all sources of deemed appropriations from their relevant minister(s) in their 2019–20 financial statements, as required by AASB 1058 ‘Income from Not-for Profit Entities’, because they misunderstood what constituted deemed funding under the GSF Act and whether this included cluster grants, special deposit and working accounts.
The State delayed commencing Part 7 of the GSF Act due to COVID-19.

Agencies were expected to prepare their 2019–20 financial statements under Division 7.2 of the GSF Act. Due to timing issues caused by the COVID-19 pandemic, NSW Treasury delayed commencing Part 7 until 2020–21. Instead, agencies prepared their 2019–20 financial statements and had them audited under the Public Finance and Audit Act 1983 (PF&A Act).

NSW Treasury also extended the statutory deadline for submission of their 2019–20 financial statements. The extension was enacted through the COVID-19 Legislation Amendment (Emergency Measurers–Treasurer) Act 2020 (COVID-19 Measures Act).

The COVID-19 Measures Act also:

  • allowed deferral of the 2020–21 NSW State budget by six months to 31 December 2020
  • ensured agency funding is available until the NSW Budget and Appropriation Bill is passed.

Implementation of new accounting standards

This year, the State and its agencies implemented the requirements of the following new accounting standards:  
  • AASB 15 ‘Revenue from Contracts with Customers’  
  • AASB 16 ‘Leases’  
  • AASB 1058 ‘Income of Not-for-Profit Entities’

Whilst the impact of adopting these standards on agencies’ financial statements was minimal, the assessment of their impact and application required focused effort.

AASB 15 ‘Revenue from Contracts with Customers’ changed the timing and pattern of recognising revenue and increased the extent of financial reporting disclosures in 2019–20 financial statements. The main impact was to bring forward the recognition of revenue from non-intellectual property licenses. The new standard requires revenue from licences with no performance obligations to be recognised at the commencement of the licence rather than progressively over the licence period.

AASB 15 was implemented by For-Profit entities in 2018–19.

The impact of adopting AASB 15 increased the State’s net worth by $343 million at 1 July 2019.

AASB 1058 ‘Income of Not-for-Profit Entities’ prescribes how Not-For-Profit entities account for: 

  • transactions conducted on non-commercial terms
  • the receipt of volunteer services.

Under this standard, the State deferred recognition of revenue from certain capital grants, primarily funded by the Australian Government, and aligned it with the period over which the related assets are constructed. This increased opening equity by $758 million.

The impact of adopting AASB 1058 was to increase the State’s net worth by $758 million at 1 July 2019.

AASB 16 ‘Leases’ changed the way lessees recognise, account for and report operating leases in their financial statements.

With a few exceptions, such as low value and short-term leased assets, agencies now have to recognise right-of use (ROU) assets and related lease liabilities in their financial statements. A ROU asset is a lessee’s right to use an asset, the value of which is amortised over the term of the lease.

Adopting AASB 16 resulted in the State reporting total assets and total liabilities of $9.3 billion and $9.8 billion respectively in 2019–20.

The impact of adopting AASB 16 reduced the State’s net assets worth by $63 million at 1 July 2019. AASB 16 also changed the timing and pattern of recording expenses in the Statement of Comprehensive Income. Rent expenses have been replaced by amortisation and interest expenses.

Agencies had to devote significant effort to implement these standards and ensure their 2019–20 financial statements materially complied with the standards’ requirements. Because each agency is unique, implementing the standards required more effort from some than others. Last year, the Audit Office highlighted that preparing well in advance was key to ensuring agencies effectively transition to the new standards. Despite the new standards being issued well in advance of their commencement dates, some agencies did not prepare sufficiently for their implementation. As a result, they had not finalised their opening balance adjustments in time for the Audit Office’s early close review.

AASB 16 allows ROU assets to be subsequently measured at fair value or cost. NSW Treasury originally mandated that all agencies recognise ROU assets at fair value. NSW Treasury subsequently mandated that all agencies measure ROU assets at cost. This decision was made by NSW Treasury in consultation with the Audit Office. While simplifying measurement, this change was made very late in the year.

Although ROU assets are not subject to revaluations, they are still subject to impairment assessments required by AASB 136 ‘Impairment of Assets’. The COVID-19 pandemic caused an unexpected downturn in the commercial property rental market. This resulted in the carrying values of the State’s ROU assets being $478 million higher than the recoverable amount at 30 June 2020. As a result, the asset values were written down by this amount. The related liability did not decrease similarly because the State is contractually committed to pay the agreed rents over the lease period.

Restart NSW

Restart NSW was established in 2011 to fund the State’s major infrastructure projects.

Restart NSW funds Rebuilding NSW, the government’s ten-year plan to invest $23 billion in new infrastructure. Its infrastructure projects, including Sydney Metro City and Southwest and Parramatta Light Rail, are primarily funded by proceeds from the government’s asset recycling program. The Restart fund had a balance of $15.0 billion at 30 June 2020 ($19.0 billion in 2018–19).

The fund paid $4.4 billion for infrastructure projects in 2019–20 ($5.6 billion in 2018–19). The largest payments were for transport projects, including Sydney Metro, Parramatta Light Rail, and an equity contribution to Rail Corporation NSW.

The funds are invested in the NSW Infrastructure Future Fund (NIFF), which is allowed under the Restart NSW Fund Act 2011 (Restart Act). The NIFF is an investment vehicle for the fund to help the NSW Government meet its infrastructure objectives. It is managed by TCorp. In 2019–20, the fund earned a net return of 1.84 per cent, slightly lower than the annual benchmark return of 1.9 per cent.

The Restart Act requires the fund to report on the percentage of payments directed to rural and regional infrastructure projects and whether this represents at least 30 per cent of the total payments from the fund. The Restart NSW Fund Amendment (Rural and Regional Infrastructure Funding) Bill 2020 was recently introduced in Parliament. The object of the Bill is to amend the Restart Act to provide that at least 30 per cent of the total payments from the Restart NSW Fund must be made on infrastructure projects in rural and regional areas in each financial year and for the life of the fund

Since inception of the Restart fund, 21.7 per cent has been invested in rural and regional infrastructure projects and 27.3 per cent is expected to be spent over the life of the fund. Both represent less than 30 per cent of total payments made from the fund.

The fund directed 31.8 per cent of its payments towards rural and regional infrastructure projects in 2019–20.

Rural and regional vs metro

SOURCE: 2013–2020 (Restart audited financial statements)

Key audit matters

Key Audit Matters (KAMs) are matters considered of most significance to the conduct of an audit. Australian Auditing Standard 701 ‘Communicating Key Audit Matters’ defines KAM’s as those matters considered of most significance to the audit. Whilst inclusion of KAM’s is not a mandatory requirement for public sector entities, inclusion of these matters add value for users by explaining areas of audit focus, increasing transparency and giving users a better understanding of significant management judgements in the State’s financial statements.

This year a KAM section was again included in the State’s Independent Auditor’s Report for the total state sector. KAMs were also included in twenty of the State’s significant agencies’ Independent Auditor’s Reports for the first time. These included all principal departments.

The KAM included in the Total State Sector Independent Auditor’s Report focused on the following risks:

  • fair valuing measurement of property, plant and equipment
  • implementation of the new leasing standard
  • valuation of defined benefits superannuation and long service leave liabilities
  • valuation of financial instruments
  • valuation of outstanding claim liabilities
  • taxation and statutory revenue
  • authorisation to incur expenditure.

 

Looking forward

Audit Office’s work plan for 2020–21

The Audit Office’s 2020–21 work plan focuses on the State’s response and recovery from recent emergencies.

The 2019–20 bushfire and flood emergencies and the COVID-19 pandemic continue to have had a significant impact on the people and public sector of New South Wales. The scale of government responses to these events has been significant and has required a wide-ranging response through emergency response coordination, service delivery, governance and policy.

Significant resources have been directed toward these responses, and in assisting rebuilding and economic recovery. Some systems and processes have changed to reflect the need for quick responses to immediate needs.

As the State’s independent auditor, it is appropriate that we respond to the increasing and changing risk environment presented by these events and focus our efforts on providing assurance on how effectively aspects of these emergency responses have been delivered. It is also important that we be attentive to the particular financial and governance risks arising from the scale and complexity of government responses to these events.

These emergencies are having a significant impact today and they are likely to continue to have an impact into the future. We will take a phased approach to ensure our financial and performance audits address the following elements of the emergencies and the government’s responses:

  • the Government’s preparedness for emergencies
  • its initial responses to support people and communities impacted by the 2019–20 bushfires and floods, and COVID-19
  • the governance and oversight risks that arise from the need for quick decision making and responsiveness
  • the effectiveness and robustness of processes to direct resources toward recovery efforts and ensure good governance and transparency in doing so
  • the mid to long-term impact of government responses to the bushfires and COVID-19
  • whether government investment has achieved desired outcomes.

Implementation of AASB 1059

Accounting standards implementation continues next

AASB 1059 ‘Service Concession Arrangements: Grantors’

AASB 1059 will require public sector entities (grantors) that enter into service concession arrangements with private sector operators for the delivery of public services recognise more service concession assets and liabilities in their financial statements. The standard is effective from 1 July 2020.

The State has estimated the future impact of adopting AASB 1059 will be to increase its net worth by $2.1 billion.

Most agencies have commenced assessing the terms and conditions of their existing commercial arrangements to determine whether they are service concession arrangements within the scope of AASB 1059.

Agencies must prepare well in advance to effectively transition to the new standard. Agencies should:

  • engage with key stakeholders including auditors, audit and risk committees and NSW Treasury
  • identify any skill gaps and training needs
  • seek external guidance from accounting professionals,
  • assess the completeness of all contracts with private sector operators and government agencies that may fall under service concession arrangements
  • document key judgements
  • consider what systems are required to capture the necessary data and perform calculations, ensure they are operating effectively and are fully integrated in the agency’s operations in time for the transition
  • communicate new policies and guidelines
  • socialise the opening balance adjustments and new disclosures with the auditors.