Reports
Service NSW's handling of personal information
The Auditor-General for New South Wales, Margaret Crawford, released a report today examining the effectiveness of Service NSW’s handling of customers’ personal information to ensure its privacy.
The audit found that Service NSW is not effectively handling personal customer and business information to ensure its privacy. Service NSW continues to use business processes that pose a risk to the privacy of personal information. This includes the routine emailing of personal information between Service NSW service centres and other agencies, which is one of the processes that contributed to the data breach earlier this year. The audit found that previously identified risks and recommended solutions had not been implemented on a timely basis.
The Auditor-General made eight recommendations aimed at ensuring improved processes, technologies, and governance arrangements for how Service NSW handles customers’ personal information.
The Hon. Victor Dominello, MP, Minister for Customer Service, requested this audit under section 27(B)(3)(c) of the Public Finance and Audit Act 1983 following public reports in May 2020 of a cyber security attack which had led to a breach of Service NSW customer information. This audit also included the Department of Customer Service which supports Service NSW with privacy, risk and governance functions.
Service NSW was established in 2013 with the intention that it would, over time, 'become the primary interaction point for customers accessing New South Wales Government transaction services'.
Service NSW's functions are set out in the Service NSW (One stop Access to Government Services) Act 2013. This legislation allows for other NSW Government agencies to delegate to and enter into agreements with the Chief Executive Officer of Service NSW in order for Service NSW to undertake service functions for the agency.
Service NSW now has agreements with 36 NSW Government client agencies to facilitate over 1,200 types of interactions and transactions for the community.
The nature of each agreement between Service NSW and its client agencies varies. Some client agencies have delegated authority to allow Service NSW staff to conduct transactions on their behalf in the agencies' systems. Other arrangements do not include the same degree of delegation. In these cases, Service NSW provides services such as responding to enquiries and validating documents.
In addition, Service NSW conducts transactions for its own programs, such as the Seniors Card. Personal information for these programs, as well as information for customers' MyServiceNSW accounts, are stored by Service NSW on its Salesforce Customer Relationship Management (CRM) system.
In March 2020, Service NSW suffered two cyber security attacks in short succession. Technical analysis undertaken by the Department of Customer Service (DCS) concluded that these attacks resulted from a phishing exercise through which external threat actors gained access to the email accounts of 47 staff members. These attacks resulted in the breach of a large amount of personal customer information that was contained in these email accounts. See Section 1.1 for further details.
This audit is being conducted in response to a request from the Hon. Victor Dominello, Minister for Customer Service, under section 27B(3)(c) of the Public Finance and Audit Act 1983. Minister Dominello requested that the Auditor General conduct a performance audit in relation to Service NSW's handling of sensitive customer and business information.
This audit assessed how effectively Service NSW handles personal customer and business information to ensure its privacy.
It addressed the following:
- Does Service NSW have processes and governance in place to identify and manage risks to the privacy of personal customer and business information?
- Does Service NSW have policies, processes and systems in place that support the effective handling of personal customer and business information to ensure its privacy?
- Has Service NSW effectively implemented its policies, processes and systems for managing personal customer and business information?
ConclusionService NSW is not effectively handling personal customer and business information to ensure its privacy. It continues to use business processes that pose a risk to the privacy of personal information. These include routinely emailing personal customer information to client agencies, which is one of the processes that contributed to the March 2020 data breach. Previously identified risks and recommended solutions had not been implemented on a timely basis.Service NSW identifies privacy as a strategic risk in both its Risk Management Guideline and enterprise risk register and sets out a zero level appetite for privacy risk in its risk appetite statement. That said, the governance, policies, and processes established by Service NSW to mitigate privacy risk are not effective in ensuring the privacy of personal customer and business information. While Service NSW had risk identification and management processes in place at the time of the March 2020 data breach, these did not prevent the breach occurring. Some of the practices that contributed to the data breach are still being followed by Service NSW staff. For example, business processes still require Service NSW staff to scan and email personal information to some client agencies. The lack of multi factor authentication has been identified as another key contributing factor to the March 2020 data breach as this enabled the external threat actors to gain access to staff email accounts once they had obtained the user account details through a phishing exercise. Service NSW had identified the lack of multi factor authentication on its webmail platform as a risk more than a year prior to the breach and had committed to addressing this by June 2019. It was not implemented until after the breach occurred. There are weaknesses in the general IT and security controls implemented by Service NSW over its Salesforce Customer Relationship Management (CRM) system, which holds the personal information of over four million NSW residents.Internal audits carried out by Service NSW, including one completed in August 2020, have identified significant weaknesses in the general IT and security controls implemented by Service NSW over its Salesforce CRM system. These include deficiencies in the management of role based access, monitoring and audit of user access, and partitioning of program specific transaction information. These deficiencies create an increased risk of unauthorised access to the personal information of over four million customers held in the system. Lines of responsibility for meeting privacy obligations are not clearly drawn between Service NSW and its client agencies.Service NSW has agreements in place with client agencies. However, the agreements lack detail and clarity about the roles and responsibilities of the agencies in relation to the collection, storage and security of customer's personal information. This lack of clarity raises the risk that privacy obligations will become confused and missed between the agencies. Service NSW carries out privacy impact assessments for major new projects but does not routinely review existing processes and systems.Service NSW carries out privacy impact assessments as part of its routine processes for implementing major new projects, ensuring that privacy management is considered as part of project design. Service NSW does not regularly undertake privacy impact assessments or reviews of existing or legacy processes and systems, which has resulted in some processes continuing despite posing significant risks to the privacy of personal information, such as the scanning, emailing, and storing of identification documents. |
1. Key findings
Service NSW identifies privacy risks, but the controls and processes it put in place to mitigate these privacy risks were not adequate to prevent or limit the extent of the data breach that occurred in March 2020
Service NSW’s approach to risk management is framed by its Risk Management Guideline, which defines 'privacy and compliance' as one of the key types of risk for the agency. Service NSW's enterprise risk register identifies four strategic privacy related risks. Service NSW has set out a zero level appetite for privacy risk in its risk appetite statement.
Service NSW has assessed the adequacy of its controls for privacy risks as needing improvement. To be fully effective, the Risk Management Guideline says that these controls should have a focus that is ‘largely preventative and address the root causes’.
One of the business processes that was a key contributing factor to the data breach was the emailing of personal information by Service NSW staff to client agencies.
This process had been identified as a risk prior to the breach and some steps had been put in place to mitigate the risk. In particular, staff were required to manually delete emails that contained personal information. However, these measures were ineffective in preventing the breach, as the external threat actors still gained access to 47 staff email accounts that contained a large amount of personal information.
It is unclear why Service NSW did not effectively mitigate this risk prior to the breaches. However, Service NSW has advised that it implemented measures in June and October 2020 to automatically archive emails likely to contain personal information. This is expected to limit the quantity of information retained in email accounts for extended periods.
Service NSW has not put in place any technical or other solutions to avoid Service NSW staff having to scan and email personal information to some client agencies. Urgent action is needed to remove the requirement for staff to email personal information to client agencies, thereby mitigating the risk inherent in sending and storing this information using email.
There are weaknesses in the general IT and security controls implemented by Service NSW over its Salesforce CRM system, which holds the personal information of over four million customers
There are weaknesses in the general IT and security controls implemented by Service NSW over its Salesforce CRM system. These weaknesses include deficiencies in governance of role based access, monitoring and audit of staff access, and partitioning of program specific transaction information. These deficiencies create an increased risk of unauthorised access to the personal information of over four million customers which is stored in this system.
In addition, there is an absence of important controls to safeguard customers' privacy, such as multi factor authentication and reviewable logs of access history to their information. Such controls, when properly implemented, would enhance the control that customers are able to exercise over their personal information.
A privacy impact assessment conducted on Service NSW’s Salesforce CRM system in 2015 recommended that the system include the ability for customers to review access history to their personal information, as well as the option for customers to apply multi factor authentication to their accounts. While both these recommendations appeared positively received by Service NSW, neither have been implemented.
Since its inception, Service NSW’s use of Salesforce has extended to storing transaction data, particularly for transactions for which Service NSW is responsible, such as the Seniors Card. It also holds details of over four million MyServiceNSW account holders, including name, email address and phone number, and optional address details. It was not originally intended for the system to hold this volume and nature of customer information.
Lines of responsibility for meeting privacy obligations are unclear between Service NSW and its client agencies
Service NSW's privacy management plan does not clearly set out the privacy obligations of Service NSW and its client agencies. It sets out that 'compliance with the privacy principles will primarily be the responsibility of that [client] agency'. However, Service NSW has its own obligations under the security principles of the Privacy and Personal Information Protection Act 1998 (PPIP Act) to take reasonable steps to prevent unauthorised access to personal information, which is not made clear in the privacy management plan.
The agreements between Service NSW and client agencies reviewed for this audit only include general and high level references to privacy. Most do not include details of each parties' privacy responsibilities such as: which agency will provide the customer with a privacy notice explaining how their personal information will be handled, how personal information will be kept secure, how long Service NSW will retain information, what processes will be followed for internal reviews, and what specific planning is in place to respond to data breaches.
Service NSW's privacy management plan has not been updated to include new programs and governance changes
Service NSW's privacy management plan includes most of the matters required by law or good practice, with some exceptions. It does not explain any exemptions that the agency commonly relies on under the PPIP Act and does not address any health information that Service NSW may handle. It had also not been updated to reflect governance changes and the fact that, at the time this audit commenced, Service NSW was disclosing the content of internal review applications (the formal expression for 'complaints') to the Department of Customer Service (DCS). These governance changes were part of the centralisation of Service NSW's corporate support functions into DCS in late 2019, though internal review staff were seconded back into Service NSW during the course of this audit.
The current July 2019 privacy management plan has also not been updated since the rollout of a number of major new initiatives in 2020. These include 2019–20 bushfire emergency recovery initiatives (such as small business grants) and COVID 19 pandemic response initiatives (such as small business grants, border permits and the COVID safe check in app).
Service NSW routinely conducts privacy impact assessments for new initiatives, though privacy risks remain in legacy systems and processes
Service NSW routinely conducts privacy impact assessments for major new initiatives and the assessments reviewed for this audit largely accorded with good practice guidance.
Service NSW does not routinely review existing processes and systems to ensure that they are effective in ensuring the privacy of customer personal information. Business processes that create the highest risk to privacy, such as emailing of personal information, are more common in these longstanding legacy systems.
Service NSW's significant and rapid growth has outpaced the establishment of a robust control environment which has exacerbated privacy risks
Since it was established in 2013, Service NSW has experienced significant growth in the number and diversity of the types of transactions it provides, as well as the number of client agencies with which it works. The pace and extent of this growth has contributed to important controls not being properly implemented on a timely basis, which has heightened privacy risks, particularly in regard to existing, legacy systems and processes.
The pace of change and increasing demand for new program implementation has limited the opportunity for Service NSW, in collaboration with its client agencies, to revisit and redesign legacy business practices which pose a greater privacy risk. This includes the scanning and emailing of personal information.
While 2019–20 has seen additional demands placed on Service NSW in responding to the 2019–20 bushfire emergency and COVID 19 pandemic, it is the nature of the agency’s work that it operates in a fast paced and complex environment, where it is required to respond to multiple client agencies and stakeholders. Ensuring customer privacy should be integral to Service NSW’s business as usual operations.
2. Recommendations
Service NSW commissioned a number of external reviews and investigations stemming from the data breaches. The Auditor General's recommendations below have taken these other reviews into account. In order to offer assurance that it is appropriately protecting the privacy of its customers, Service NSW should address the full breadth of findings and recommendations made across all relevant reviews.
As a matter of urgency, Service NSW should:
1. in consultation with relevant client agencies and the Department of Customer Service, implement a solution for a secure method of transferring personal information between Service NSW and client agencies
2. review the need to store scanned copies of personal information and, if still required, implement a more secure method of storing this information and regular deletion of material.
By March 2021, Service NSW should:
3. ensure that all new agreements entered into with client agencies from 1 April 2021 address the deficiencies identified in this audit, including that they provide clarity on:
- the content and provision of privacy collection notices
- the terms by which personal information will be retained, stored, archived, and disposed of when no longer required
- steps that will be taken by each agency to ensure that personal information is kept secure
- the circumstances in which, and processes by which, applications for internal review will be referred by one agency to the other
- how identified breaches of privacy will be handled between agencies
4. in collaboration with the Department of Customer Service, review its privacy management plan to address the deficiencies raised in this audit, including:
- to clarify Service NSW's understanding of how responsibility for meeting privacy obligations are delineated between Service NSW and client agencies
- to better reflect the full scope and complexity of personal information handled by Service NSW
- to better explain how applications for internal review are handled between Service NSW and the Department of Customer Service
- to ensure regular ongoing review, either according to a schedule or when Service NSW experiences substantial change to its programs and handling of personal information
5. in consultation with the Department of Customer Service, review its policies and processes for the management of privacy risks, including to:
- ensure that there are appropriate mechanisms to escalate identified privacy risks from business units to the Executive Leadership Team
- ensure that there are action plans to address strategic privacy risks that are assessed as having ineffective controls.
By June 2021, Service NSW should:
6. address deficiencies in the controls over, and security for, its Salesforce customer relationship management and related systems that hold customer personal information, including:
- establish policies and processes for regular access reviews and monitoring of user activity in these systems, including for privileged users
- enable partitioning and role based access restrictions to personal information collected for different programs
- provide customers the choice to use multi factor authentication to further secure their MyServiceNSW accounts
- enable customers to view the transaction history of their personal information to detect possible mishandling.
By December 2021, Service NSW should:
7. ensure that all existing agreements with client agencies address the deficiencies identified in this audit, including that they provide clarity on:
- the content and provision of privacy collection notices
- the terms by which personal information will be retained, stored, archived, and disposed of when no longer required
- steps that will be taken by each agency to ensure that personal information is kept secure
- the circumstances in which, and processes by which, applications for internal review will be referred by one agency to the other
- how identified breaches of privacy will be handled between agencies
8. carry out a risk assessment of all processes, systems and transactions that involve the handling of personal information and undertake a privacy impact assessment for those that:
- are identified as high risk and have not previously had a privacy impact assessment
- have had major changes or updates since the privacy impact assessment was completed.
Appendix one – Responses from agencies
Appendix two – About the audit
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Central Agencies 2020
This report analyses the results of our audits of the financial statements of the Treasury, Premier and Cabinet, Customer Service cluster agencies (central agencies), and the Legislature for the year ended 30 June 2020. The table below summarises our key observations.
1. Financial reporting
| Audit opinions and timeliness of reporting |
Unqualified audit opinions were issued on the 2019–20 financial statements of central agencies and the Legislature. The audit opinion on the Social and Affordable Housing NSW Fund's compliance with the payment requirements of the Social and Affordable Housing NSW Fund Act 2016 was qualified. All agencies met statutory deadlines for submitting |
| Agencies were financially impacted by recent emergency events | The NSW Government allocated $1.4 billion to provide small business support and bushfire recovery relief, support COVID-19 quarantine compliance management, recruit more staff to respond to increased customer demand, and meet additional COVID-19 cleaning requirements. Agencies spent $901 million (64 per cent of the allocated funding) for the financial year ended 30 June 2020. NSW Self Insurance Corporation reported an increase of $850 million in its liability for claims related to emergency events. |
| AASB 16 'Leases' resulted in significant changes to agencies' financial position | The implementation of new accounting standards was challenging for many agencies. The New South Wales Government Telecommunications Authority was not well-prepared to implement AASB 16 'Leases' and had not completely assessed contracts that contained leases. This resulted in understatements of leased assets and liabilities by $56 million which were subsequently corrected. |
| Implementation of new revenue standards | NSW Treasury did not adequately implement the new revenue standard AASB 1058 ‘Income of Not-for-Profit Entities’ for the Crown Entity. This resulted in understatements of $274 million in opening equity and $254 million to current year revenue, which have been corrected in the final financial statements. |
2. Audit observations
| Management letter findings and repeat issues | Our 2019–20 audits identified nine high risk and 122 moderate risk issues across central agencies and the Legislature. The high risk issues were identified in the audits of:
High risk findings include:
Of the 122 moderate risk issues, 36 per cent were repeat issues. The most common repeat issue related to weaknesses in controls over information technology user access administration, which increases the risk of inappropriate access to systems and records. |
| Grants administration for disaster relief | Service NSW delivers grants responding to emergency events on behalf of other NSW Public Sector agencies. Since the first grant program commenced in January 2020, Service NSW processed approximately $791 million to NSW citizens and businesses impacted by emergency events for the financial year ended 30 June 2020. A performance audit of grants administration for disaster relief is planned for 2020–21. It will assess whether grants programs administered under the Small Business Support Fund were effectively designed and implemented to provide disaster relief. |
| Internal controls at GovConnect NSW service providers require enhancement |
GovConnect NSW provides transactional and information technology services to central agencies. It engages an independent service auditor (service auditor) from the private sector to perform annual assurance reviews of controls at service providers, namely Infosys, Unisys and the Department of Customer Service (DCS). The service auditor issued:
These may impact on the ability of agencies to detect and respond to a cyber incident. Recommendation: We recommend DCS work with GovConnect service providers to resolve the identified control deficiencies as a matter of priority. |
| The NSW Public Sector's cyber security resilience needs to improve |
The NSW Cyber Security Policy requires agencies to provide a maturity self-assessment against the Australian Cyber Security Centre (ACSC) Essential 8 to the head of the agency and Cyber Security NSW annually. Completed self-assessment returns highlighted limited progress in implementing the Essential 8. Repeat recommendation: Cyber Security NSW and NSW government agencies need to prioritise improvements to their cyber security resilience as a matter of urgency |
| Three Insurance and Care NSW (icare) entities had net asset deficiencies at 30 June 2020 | The Workers Compensation Nominal Insurer, NSW Self Insurance Corporation and the Lifetime Care and Support Authority of NSW all had negative net assets at 30 June 2020. These icare entities did not hold sufficient assets to meet the estimated present value of all of their future payment obligations at 30 June 2020. The deterioration in net assets was largely due to increases in outstanding claims liabilities. Notwithstanding the overall net asset deficiencies, the financial statements for these entities were prepared on a going concern basis. This is because future payment obligations are 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. |
| icare has not been able to demonstrate that its allocation of costs reflects the actual costs incurred by the Workers Compensation Nominal Insurer and other schemes |
Costs are incurred by icare as the 'service entity' of the statutory scheme it administers, and then subsequently recovered from the schemes through 'service fees'. In the absence of documentation supported by robust supporting analysis, there is a risk of the schemes being overcharged, and the allocation of costs being in breach of legislative requirements. Recommendation: icare should ensure its approach to allocating service fees to the Workers Compensation Nominal Insurer and the other schemes it manages, is transparent and reflects actual costs. |
| icare did not comply with GIPA requirements | icare did not comply with the Government Information (Public Access) Act 2009 (GIPA) contract disclosure requirements in 2019–20 and has not complied for several years. A total of 417 contracts were identified by management as not having been published on the NSW Government’s eTendering website. The final upload of these past contracts occurred on 20 August 2020. |
| Implementation of Machinery of Government (MoG) changes | MoG changes impacted the governance and business processes of some agencies. Our audits identified and reported areas for improvement in the consolidation of corporate functions following MoG implementation processes at Infrastructure NSW and in the Customer Service cluster. |
This report provides Parliament and other users of NSW Government central agencies' financial statements and the Legislature's financial statements with the results of our financial audits, observations, analyses, conclusions and recommendations.
Emergency events, such as bushfires, floods and the COVID-19 pandemic significantly impacted agencies in 2019–20. Our findings on nine agencies that were most impacted by recent emergency events are included throughout this report.
Refer to Appendix one for the names of all central agencies and Appendix four for the nine agencies most impacted by emergency events.
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision making are enhanced when financial reporting is accurate and timely. This chapter outlines our audit observations on the financial reporting of central agencies and the Legislature for 2020, including the financial implications from recent emergency events.
Section highlights
|
Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision making.
This chapter outlines:
- our observations and insights from the financial statement audits of agencies in the central agencies and the Legislature
- our assessment of how well agencies adapted their systems, policies, procedures and governance arrangements in response to recent emergencies.
Section highlights
|
State Finances 2020
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.
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)
$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
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
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.
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.
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
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.
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
Solar Bonus Scheme
A NSW Auditor General’s Report has found that the NSW Government and its agencies grossly underestimated the cost and number of people that would install systems under the Solar Bonus Scheme.
By October 2010, the estimated cost of the Scheme, if it continued the way it was going, would have reached $3.988 billion. More than ten times the original estimate of $362 million. In response to the increased cost, the gross tariff for new applicants was reduced from 60 to 20 cents reducing the estimated cost to $1.954 billion.
It was a statutory requirement that when 50 mega watts of installed capacity was reached, the Government would review the Scheme. By the time the review was completed the installed capacity had reached 101 mega watts.
Two Ways Together - NSW Aboriginal Affairs Plan
To date the Two Ways Together Plan (the Plan) has not delivered the improvement in overall outcomes for Aboriginal people that was intended. Stronger partnerships between the government and Aboriginal people are only beginning to emerge. The disadvantage still experienced by some of the estimated 160,000 Aboriginal people in NSW is substantial. For example, the unemployment rate for Aboriginal people is at least three times higher than the rate for all NSW residents and hospital admissions for diabetes are also around three times higher.
Parliamentary reference - Report number #213 - released 18 May 2011
