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House of Assembly - Fifty-First Parliament, Third Session (51-3)
2009-06-17 Daily Xml
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UNFUNDED LIABILITIES

Mr GRIFFITHS (Goyder) (14:37): Is the Treasurer concerned that debt and unfunded liability obligations facing the government are approaching $20 billion across the forward estimates, a figure which equates to $24,000 for every working South Australian?

The budget papers establish that the non-financial public sector net debt will peak at $6.7 billion; unfunded superannuation liabilities have risen from $4 billion to $9.8 billion; WorkCover unfunded liabilities have risen from $56 million to $1.3 billion; and the government's own WorkCover scheme has a further liability approaching $400 million, while the Treasurer has advised the house that the additional $1.7 billion for the rail yards hospital will come onto the balance sheet.

The Hon. K.O. FOLEY (Port Adelaide—Deputy Premier, Treasurer, Minister for Industry and Trade, Minister for Federal/State Relations) (14:37): No, I am not concerned at all—

Mr Williams interjecting:

The SPEAKER: Order, the member for MacKillop!

The Hon. K.O. FOLEY: —neither are the credit rating agencies. What would concern me is if we had been put on negative watch or downgraded. Then I would be very concerned, but the credit ratings are quite comfortable.

Let us just go through the components because, as always, the opposition presents figures to suit its argument. The former Liberal government corporatised SA Water and the forestry commission and, of course, corporatised ETSA and sold it. When those entities are corporatised—particularly SA Water—they go off the government's general government sector into the non-financial sector. They are trading organisations which, as entities operating in the private sector in a corporatised model, are required to behave and operate as a publicly listed company would. They are required under the National Water Initiative and federal competition requirements to have an appropriately geared balance sheet, so that they are faced with the cost of operations as we would expect to occur in the private sector. That is important, particularly if we move towards open access regimes and allow competition into the system at some future point.

That was a decision of the Liberal government. SA Water went from being a department of water to a corporatised entity. That is why the accounting treatment of that entity's debt is different from other government agencies. The borrowing or the gearing level of SA Water is established through negotiation between myself as a shareholder and the minister for water and the corporation itself. We set a gearing ratio and a gearing limit, and it operates, to the best of my understanding, within those parameters.

Now, that is prudent and SA Water borrows what it needs for its capital program. It services that debt, then it pays for the state government tax equivalents, and a certain percentage of its profit—90 per cent or 95 per cent, I am not sure what the number is—to its shareholder. That was the consequence. We have modified it over time, but in essence that is what former minister John Olsen had put in place.

Similar applies to the forestry corporation, and we never hide that, but that is why they are not affected or not as part of the budget presentation on budget day because we are dealing with what I call the budget sector/the general government sector.

The issue of WorkCover: we have been up hill and down dale on that. The reforms that this government brought in, initially opposed by the member for Morphett—

Dr McFetridge interjecting:

The Hon. K.O. FOLEY: Excuse me, can I answer the question please? The WorkCover Corporation, with reform legislation, is on track to improve its performance substantially and, in fact, if we look at the operation, I think I am right, minister, in saying that in the last trading period (the last quarter) WorkCover produced a very good profit result in terms of its operating position. Its unfunded liability is still large—

Mr Griffiths interjecting:

The Hon. K.O. FOLEY: And that is why we changed the law—which you initially opposed—to bring the levy down.

Members interjecting:

The Hon. K.O. FOLEY: We have had a global financial crisis and we have seen the investment—

Mr Venning interjecting:

The SPEAKER: Order, the member for Schubert!

Mr Hamilton-Smith interjecting:

The Hon. K.O. FOLEY: The leader has said we have had the best seven years the state has ever had under this Labor government. Thank you, Mr Hamilton-Smith, for acknowledging—that would appear nicely in our election campaign, I think. The best seven years in this state's history: who said that? The leader of the Liberal Party.

Ms Chapman interjecting:

The Hon. K.O. FOLEY: Hear, hear! The deputy leader thinks it is the best seven years we have had as well. Excellent! But the WorkCover Corporation has taken a hit on its balance sheet, as has the Motor Accident Commission, from a dramatic loss in earnings and value of its stocks portfolio. We all know that because everyone has been affected by that.

As to the issue of the unfunded liability of public servants, that has doubled for two reasons. The growth in employment does not affect it because they are now in a defined contribution scheme. The unfunded component has—

Mr Griffiths: Accumulation.

The Hon. K.O. FOLEY: Or defined contribution.

Mr Griffiths: No, the new ones are an accumulation scheme.

The SPEAKER: Order, the member for Goyder!

The Hon. K.O. FOLEY: No, I just said that the new scheme is a defined contribution, or an accumulation. It is the same thing. Defined contribution: a worker puts in 9 per cent. That is a defined contribution. Under the old defined benefits, there is a defined benefit. In the marketplace, they are referred to as defined contributions.

As to the unfunded defined benefit scheme, which is closed, the reason that has expanded in size is the result of two things. One is loss of earnings and loss of value in its portfolio through the global financial crisis and the collapse in excess of 20 per cent in stock markets year on year. Second is what is called the discount rate. I am happy to explain this in more detail for the shadow minister. The discount rate is the rate by which you—

Ms Chapman interjecting:

The SPEAKER: Deputy leader, order!

The Hon. K.O. FOLEY: You wouldn't even understand what I am talking about, Vickie; let's be real. The discount rate is the measure by which you value the unfunded liability—that is, the discount rate is the recognised earnings of the funded position of your scheme and how long it will take to pay that back.

What happens when interest rates have gone down rapidly around the world and you have seen a halving in cash rates, you have seen a substantial reduction in the 10 year bond rate. When the interest rates go down, it is assumed by the valuation people (the actuaries) that your earnings will go down accordingly. Where it might have been a long-term historical average of 7.5 per cent, you will have a smaller unfunded liability. At one point there it was as low as 4.2 per cent and it almost doubled your unfunded component, simply by an accounting measure. That unfunded liability number is irrelevant, to an extent, in terms of its exponential growth.

An honourable member interjecting:

The Hon. K.O. FOLEY: Yes, we have increased our contribution from the budget to pay back the money; so, it has an impact there. But, when it comes to the rating agencies, one of the things that Standard & Poor's have done is look through the unfunded liability issue, in that they have applied in their methodology to reviewing our state's indebtedness by not using the discount rate that is applicable. They look at what the discount rate or the earnings rate was at the time that we were AAA rated, and it was 7.5 of the long-term average. They still believe that the long-term average earnings of these funds will be positive 7.5.

The international world accounting standards that we have adopted—and we are one of the first states if not the first state to do it; we got ahead of the other states—has what they call a mark-to-market approach. You have to essentially account for your position on a daily basis. You mark to what the market is. That is an international accounting rule. I think it is a dumb rule, to be perfectly frank, and many people in public financing think the same, that it is a really unfair measure on states that have these liabilities. Therefore, the rating agencies apply a more appropriate number to it.

In fact—and I cannot be absolute on this—my understanding is that Moody's apply similar thinking. In fact, when they do their methodology I think they exclude the unfunded liabilities, to some extent, from their methodology reviews. All I am saying is that the $9.8 billion referred to is a wildly exaggerated number, not by the member but by the fact that we mark-to-market using the current discount rate that is applicable.

Recapping that long but important answer: I think the $2 million or $3 million held by public corporations is appropriate debt, it is good debt, and it is required debt to run and operate and properly gear our trading enterprises. In terms of the unfunded liability, we have done nothing more than adopt the former Liberal treasurer's (Stephen Baker) decision to pay back our unfunded liabilities over 30 years. We are well on track to doing that. There is no increase in real indebtedness there other than the accounting treatment and the falloff in markets, which we hope will be quickly reversed.

WorkCover is a short to medium term package in play to bring that back to its full solvency. The Motor Accident Commission is still fully solvent (93 to 94 per cent), but to a large extent it is well placed. All in all, I am more than comfortable with the state's debt position. I am more than comfortable with the way our enterprises are managing their debt. I am quite comfortable with our funds management corporation, chaired by a pre-eminent Australian female director, Helen Nugent, who serves on the Macquarie board and is chair of Swiss Re, and we have a good number of very senior and serious business people on the corporation.

All in all, the government's indebtedness—this has been a long answer but it is an important answer—is well managed, fully under control, certainly better than states like Queensland, and, to reassure the member, that is why we made the AAA credit rating an absolute must in this budget. We have achieved that, and the rating agencies are more than comfortable with our debt position.

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