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House of Assembly - Fifty-First Parliament, Third Session (51-3)
2009-03-04 Daily Xml
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FUNDS SA

Mr HAMILTON-SMITH (Waite—Leader of the Opposition) (14:23): To what extent has the government's deficit and unfunded liability position worsened since the Mid-Year Budget Review and, in particular, what are Funds SA's investment losses so far in 2008-09? The Mid-Year Budget Review released in December '08 revealed a deficit of $112 million. Since that time financial conditions have worsened. At 30 June 2008, Funds SA had $14.2 billion worth of funds invested.

The Hon. K.O. FOLEY (Port Adelaide—Deputy Premier, Treasurer, Minister for Industry and Trade, Minister for Federal/State Relations) (14:23): That is a good question and I look forward to answering it. Since the mid-year review, as I have said, a number of things have happened. Clearly the extent to which the global financial crisis has gripped the world and, particularly, Australia has been reflected in significant further cuts in the forecast of receipts of GST revenue. We have lost a further $800 million over four years since the mid-year review was brought down. The mid-year review number on revenue only lasted a matter of weeks until that number was forecast down by upwards of $800 million. We are seeing some softening in real estate transactions, not unexpected, and, of course, we are seeing a significant—

Mr Williams interjecting:

The Hon. K.O. FOLEY: Sorry?

Mr Williams interjecting:

The SPEAKER: The member for MacKillop is warned.

The Hon. K.O. FOLEY: I have seen a softening of, obviously—

An honourable member interjecting:

The Hon. K.O. FOLEY: Mr Speaker, this is a very good question by the leader, and I would like to be given the opportunity to answer it in some detail without having to put up with interjections, because, quite frankly, if they are not prepared to listen, I will not give the answer.

We are seeing a softening in a number of activity areas, and we will just have to see how that goes through in terms of the outcome, whether or not we are starting to reach the bottom. Australia's numbers out today were not good—a 0.5 per cent reduction in GDP for this quarter—but when compared to the rest of the world, we are still doing exceptionally well.

When it comes to the unfunded liabilities of a number of our corporations, two factors are in account. Have we lost more from our earnings since the mid-year review? Without the data in front of me I still think I can comfortably say: absolutely. What that number is, I will take advice as to the appropriateness and robustness of that number, and release what I am able to to the Leader of the Opposition and to the parliament; but, it is clearly suffering further losses.

The other issue is that, in measuring an unfunded liability, there was an accounting rule change in Australia that requires us to value that unfunded liability using the risk-free discount rate. That is effectively the bond rate that is in the market. When the bond rate goes down, your liabilities go up exponentially. Therefore, what that says is that you are going to earn, theoretically, a lot less on your earnings than you would have otherwise. Therefore, with less earnings, the unfunded liability grows.

That risk-free discount rate approach was not necessarily a bad thing in different economic times, but it is causing us a lot of problems. In fact, I discussed this matter with the rating agencies in the last two weeks, and I discussed it in a lengthy phone call with the Victorian Treasurer, John Lenders, this morning. What it is effectively doing is the mark-to-market valuation of your unfunded liability.

The truth of the matter is that our unfunded liability has grown enormously as measured by the current discount rate. That is an erroneous number to work with because, obviously, we will not be earning 4 per cent in the long run. The long-term earnings rate of our superannuation funds have been around about 7.5 per cent. In fact, when the state regained its AAA credit rating, the discount rate that was used to value our unfunded liability was 7.5 per cent. When you use that calculation, the true nature of our unfunded liability reduces dramatically.

In the discussions that I have had with the rating agencies, they understand this and, indeed, are of a similar view, that the current discount rate is really not a rate that gives a meaningful measure of the true nature of our unfunded liabilities. That is not saying the accounting standard is wrong, but it is showing that the accounting standard is proving not irrelevant but very difficult to have any meaningful substance to it. In fact, this is a matter that I am considering taking up with the Accounting Standards Board of Australia, or the Auditors Board, or whichever the national authority is on this, to see if we can get a more sensible measurement of our unfunded liabilities in a long-run sense, not in a mark-to-market or day-by-day analysis of exactly what the unfunded liability is.

It is a long answer; it is a good question. The unfunded liability has grown significantly due to a further loss in earnings but, more significantly, by this accounting treatment using the discount rate as against a more meaningful long-term earnings rate, which is something on which I think I now have agreement from a least one rating agency that that is how they will scope our budgetary and balance sheet position.

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