Comptroller and Auditor General Report Post author By Stephen Kinsella Post date September 27, 2012 Is here. It makes for fascinating reading, in particular in respect of government debt (.pdf). Categories In Uncategorized 43 Comments on Comptroller and Auditor General Report By Stephen Kinsella Senior Lecturer in Economics at the University of Limerick. View Archive → ← Analytical Chapters from New IMF WEO → Central Bank Research Bulletin 43 replies on “Comptroller and Auditor General Report” Gee thanks. I was quite enjoying my gin until I read the debt report. 106%! Already! And no sign of an end to the growth of it! (Borrowing is so far outstripping GDP growth that it is hard to view it as the darkness before dawn, more like the darkness just after dusk…). This is the annual litany of mismanagement of public funds, where the buck stops nowhere. The National Pensions Reserve Fund (NPRF) was overcharged by more than €3m by London-based State Street Bank Europe (SSBE), the report said. The NTMA, which is responsible for the NPRF, only became aware of the incident after reading media reports of the departure of two SSBE executives in October. Maybe the petty cash clerk signed off on the related invoices? Wonder what happens where you can’t be fired for such ‘minor’ issues? Page 13, para 1.19 “Accrued pension entitlements of public servants are a significant liability of the State. At end December 2009, a total of €116 billion had accrued in respect of occupational pensions payable to public servants. Those liabilities represent the estimated present value of the cash payments that fall to be met over the next 60 years in respect of pensions earned at 31 December 2009.5 Later assessments of the liability have not been made.” This is not just a problem in Ireland but across the developed world where Pay-As-You-Go (i.e. Ponzi) accounting for public pension liabilities is the norm. The lack of political debate over this €116 billion figure and the Social Insurance Fund liability (which was reported recently as being a multiple of it) is depressing. It shows that the system is incapable of facing up honestly to difficult problems. That in turn suggests that the system may not find a solution to those problems. The other point to note is that the C&AG estimated the public pension liability at €108 biillion as of 31.12.2008. So, in the 12 months to 31.12.2009, the estimated liability had increased by a startling €8 billion. @ CJL There are exceptions, Sweden being one. http://www.sweden.gov.se/sb/d/15473/a/183496 Nothing ever happens at the OPW In Ireland the interface between private property and the public sector is where much political corruption occurs. Two examples are the planning process and state commercial leases. The findings of the Mahon Tribunal were–”Corruption in Irish political life was both systemic and endemic”. In the Moriarty Tribunal the findings were ” What was attempted on the part of Mr Dunne and Mr Lowry was profoundly corrupt to a degree that was nothing short of breathtaking” Former Taoiseach Mr Haughey was a corrupt politician. Mr Haughey needed a million pounds per year to finance his lavish lifestyle. Many of Mr Haughey’s bagmen were state landlords–this was the pay back. Many Irish politicians families,friends and bagmen are state landlords. This is institutionalised political corruption. No other government in the world would sign these ruinous commercial leases. The Irish commercial property market is an organised criminal cartel who have imposed the most anti-tenant commercial lease law in the world on all Irish commercial tenants i.e. ratchet upward-only rent reviews tied to long leases. This cartel could not have operated without the state’s collusion.The rent arbitration process is systemically corrupt with the use of secret agreements,side agreements and other chicanery widespread. We are alone in the eurozone with this feudal commercial lease law. Reckless Irish banks lent tens of billions against these ruinous leases,not against the properties, and created the greatest commercial property bubble and crash in the history of mankind,courtesy of an organised white collar criminal cartel. John Corcoran* Irish Commercial Tenants Association *John is a distinguished postgraduate of the London School of Economics and Political Science and was awarded the degree Master of Science in Economics in 1978. While at the LSE he studied under Professor of Economics Basil Yamey and Professor of Accounting and Finance Will Baxter. Professor Yamey was a member of the UK’s Mergers and Monopolies Commisssion and an authority on monopolies and cartels. Professor Baxter was a world authority on inflation accounting and valuations and developed the concept “deprival value”. Another huge problem is that our debt interest rate repayments have increased from 1.6 to 5.3 over a very short period of time and are set to keep increasing rapidly over the next few years. The average interest payments are just over 4% and growth is 0-negative. I haven’t asked the following question for a while. Up to about 12 months ago some of the economists that contribute to the site were still of the opinion that a sovereign default could be avoided without outside intervention or large debt write offs. Do any of them still believe this? I genuinely think it would help government negotiations with the ECB and the finance ministers of Germany, Holland and Finland if they can state that there isn’t one academic or private sector economist in the whole country who thinks we can get out of this without help/ debt write offs. Eamonn Moran: there will be several sessions at the DEW conference in Galway October 12-14 on this very topic, details at http://www.dublineconomics.ie @eamon “I genuinely think it would help government negotiations with the ECB and the finance ministers of Germany, Holland and Finland if they can state that there isn’t one academic or private sector economist in the whole country who thinks we can get out of this without help/ debt write offs.” I think you should lower your expectations there a bit. Realistically, if you were known to be a government advisor or say, at a primary dealer in Irish gilts, how likely are you to actually say that attributably? @ eamon moran Your belief in the influence of economists is laudable but almost certainly not justified. The latest news from the front is in a report from Derek Scally. http://www.irishtimes.com/newspaper/world/2012/0928/1224324533390.html Any strategy based on trying to demonstrate in advance that the debt burden Ireland is carrying is impossible to carry is bound to fail because of the clear inability of the government – and sections of the electorate and the commentating industry – to come terms in the here and now with the the country’s, and their, reduced circumstances. It must also be clear by now that full frontal assaults on the citadel, accompanied by various degrees of grand-standing, are not proving successful. Apart from whatever steps might be agreed with the ECB, other avenues are now caught up in broader political issues, notably the fate of the Spanish government’s efforts to extricate itself from possible collapse and the federal elections in Germant in November next year cf. debate on the thread opened by Seamus Coffey on the recent statement by the AAA Troika. @ All FYI a paper from Open Europe on the strategy being forced on debtors countries; that of internal devaluation. The conclusion that can be drawn if the paper is to be believed – is that, despite all the jumping up and down about the impossibility of our situation, the news is not all that bad. http://www.openeurope.org.uk/Content/Documents/Pdfs/Internaldevaluation.pdf @ Grumpy “I think you should lower your expectations there a bit. Realistically, if you were known to be a government advisor or say, at a primary dealer in Irish gilts, how likely are you to actually say that attributably?” Who says I have high expectations. In fact I am clutching at straws but if the ECB and the Germans are saying ‘you are doing just fine Ireland, you don’t need any help’ Being able to turn around and say we cant find one crackpot economist in the whole country that agrees with your rosy analysis is a reasonable response if its true. So lets see if it is. @hoganmahew Darkness before Noon, Arthur Koestler Back to the 30s @all Debt to GNP @ 150% = UNSUSTAINABLE @colm mcc DEW you think you will be stretching to a podcast or interweb moving pictures? @ eamonn moran I doubt anyone will be taking my opinion anywhere but I’m still of the view that a sovereign default can be avoided. That’s not to say we don’t need any further assistance merely a belief that whatever is necessary to avoid that outcome will be provided. Nothing this week has changed by mind that this / cannot be delivered on. Selling the viable banks does not seem to an official priority and John Fitzgerald’s comments yesterday offer some credence to this. He may be overstating the potential value of the banks (20% of GDP but it does highlight that the gross debt position does overstate our difficulties. We are also sitting on a cash pile of around €20 billion. Whatever about my views, recent moves in Irish government bond yields suggest that PSI is, for the moment at least, considered unlikely. It would be pretty hard to argue that a sovereign default is inevitable with nine-year yields at 5.1%. There is no doubt that this is based, in part, on the belief/bet that there will be some form of OSI (Pro-Note restructuring and/or transfer of viable banks to ESM.) The debt is borderline sustainable at the moment. I think we can fall on the sustainable side of that divide. The severe position we find ourselves is what it is. The analysis of this situation will be based on the facts not an opinion poll. @ Cormac Lucey The pensions problem is not new. Did the PDs ever think about it when they were in Government ? Anyway pensions issues are dwarfed by what is going on with the Arctic ice sheet but nobody seems to be remotely interested. @seamus That sounds more like probable unsustainability but with an assumption that if things will be manipulated to hide / postpone / write off evough to avoid an actual default. For what its worth, I don’t think the low Irish gilt yields are particularly helpful currently. They are a big signal to core politicians to relax about a substantial ‘deal on the bank debt’. @ Cormac J. Lucey You missed the point made by the C&AG. The C&AG’s point was that the public service pension liability should be actuarially assessed every three years. Some needed actuarial work has been done by the Association of Retired Secondary Teachers, see for example http://www.irishtimes.com/newspaper/letters/2011/0523/1224297545121.html This is behind a pay-wall, but reads as follows: 1. Ordinary public service pensions are not funded from general taxation. In 2009 they cost €2.6 billion, but contributions were €3.1 billion, so the State made a €0.5 billion profit even before (a) the imposition of the “pension levy,” (b) the additional income-stream of the “adopted” NUI staff pension scheme and (c) the recent 4 per cent cut in public service pensions. 2. Public service workers receive only the pensions they pay for. They do not get the additional “State old-age pension” of more than €10,000 per year that other workers get. 3. Some private companies pay an “employer contribution” to employees’ pensions (averaging 5.8% of salary in 2008). The State makes no “employer contribution” to public service pensions. 4. The Government has the use of public service pension contributions for up to 40 years before pay out a pension. If this money were invested i “An Post Savings Certificates” (currently yielding 3.53% per annum), it would quadruple in value in real terms within the 40 years. Seamus Coffey “He may be overstating the potential value of the banks (20% of GDP but it does highlight that the gross debt position does overstate our difficulties. We are also sitting on a cash pile of around €20 billion.” That is a very expensive Cash pile. Cost = 5.25% and Return = 0.09%. Annualised cost of close to a Billion. (Source ..namawinelake) grumpy: no plans for a podcast but open to suggestions. Papers/presentations will be posted on the DEW website and linked from here. @Seamus Coffey “We are also sitting on a cash pile of around €20 billion.” The figure is 18.8 bn. 3.9 bn of that is HFA commercial paper… did I say bananas? I meant pyramids all the way down… Mind you, the HFA debt is clearly magical stuff. It counts to reduce both the HFA debt pile, the local government debt pile and it counts at an asset. It we abandon the commercial markets altogether, we could just issue sovereign debt to the exchequer account and hey presto, we’d have net zero national debt… I’ll stick with GGD less cash with the HFA counted somewhere, thanks… By the way, those who said that the full cost of the Anglo/INBS bailout included interest payments were right. I take issue also with this: “€715 million used to fund collateral deposited with derivative counterparties under credit support agreements, while not readily realisable, will be realised with changes in the market value of related derivatives or as the derivatives mature.” This is surely only the case if the derivative ends up in a ‘winning’ position? @ davidc “Ordinary public service pensions are not funded from general taxation”! Am I to presume that the pension contributions that public servants make come from private means? @ All FYI http://www.nytimes.com/2012/09/29/world/europe/merkels-former-finance-minister-set-to-run-against-her.html?_r=0 The election campaign in Germany has, effectively, started. The central theme of it will be; whither Europe? Where Euope is going to be before the question is answered is another matter. @ Seamus Coffee The severe position we find ourselves is what it is. The analysis of this situation will be based on the facts not an opinion poll. The “facts” are extremely debatable. In that instance the best we can do is try to gauge the opinions of those that think a bit about the subject. For what its worth I think if the economies in central europe can avoid recession then I think they will want to make sure Ireland don’t default and will do something for us, but if things continue to get worse there then all bets are off. @david c “1. Ordinary public service pensions are not funded from general taxation. In 2009 they cost €2.6 billion, but contributions were €3.1 billion, so the State made a €0.5 billion profit ……………………………………………………………………………4. The Government has the use of public service pension contributions for up to 40 years before pay out a pension.” er… I’m imagining I’ve just been appointed manager of this pension fund. I’m planning the portfolio. What are the current assets? What are the cash-flow and liability profiles for the next say, 30 years? Obviously, its not a Ponzi scheme, so, if we closed it now, what sort of annual return would we have to make on the above assets? “If this money were invested i “An Post Savings Certificates” (currently yielding 3.53% per annum), it would quadruple in value in real terms within the 40 years.” Lets be really fantastical for a moment and imagine there is zero money in the pension fund, are these An Post Savings certificates themselves an asset whose suitability to be an asset of the pension fund is inversely proportional to size of from public sector pensions being paid ? Unfunded final salary pension schemes are what the Catholic Church used to call ‘an occasion of sin’. All concerned face incentives to commit sins. Yes – let’s all stop this childish talk of unfunded PS pension liabilities, possible sovereign default, austerity, Euro breakup, mass unemployment and continually falling living standards; we need to focus on the real issue which is the disappearing Arctic ice sheet. I swear I saw a lump of it float by my house tonight. Anyone know how to make nutritional food out of ice? Are there any commercial uses for melting ice that could generate exports for Ireland? @colm mcc “grumpy: no plans for a podcast but open to suggestions” No idea. First time I had to write a markets round-up I got in very early. It was a waste of time because there was nobody else in who could tell me where the switch was to turn on the computer. I haven’t learned much since. I’m guessing someone on here could give an outline of how to record & post? @grumpy The Commission on Public Service Pensions recommended in 2000 that actuarial reviews of puublic service pension schemes and projections of public service pension outflows should be carried out on a three-year cyclical basis. The C&AG’s report points out that reguolar reviews have not been done Public Service Pension funding is usually a matter of book keeping. Deductions are made from every employee pay cheque. A “matching contribution” is made by the employer (Gov’t). A careful account is is kept of all contributions” In addition there are rules governing what the “return on investment” (ROI) will be. This is usually related to Government’s cost of borrowing over terms of 3 to 30 years. Annual reports are made surpluses are absorbed into General Revenue and shortages are mde up by increased contributions. The Pension Fund is a notional idea that exists in a book keeping ledger (these days a hard disk), Contractually the Govt is governed by the reports it makes and the employees strengthen their case by having a record of deductions. Custom dictates that Gov’ts do not renege on entitlements already incurred, barring force majeure. Conditions can be changed at any time , for example to delay age of retirement, to increase pension deductions or to reduce the amount of pension earned. For example 2% foe each year of service can become 1.75% or god forbid 1.5%. In most countries pensions of PS are not bargainable (not a strike issue) but negotiation does take place between Gov’t and PS unions. None of this may apply in Ireland, arrangements are probably a result of confabs around the parish pump and then cast in Connemara marble. @DavidC My point does not primarily concern how frequently an actuarial quantification of the public pension liability takes place but what we do with that information. I contend that we should include such estimates in our measure of national debt. We should do the same with estimates of any actuarial deficit at the Social Insurance Fund. This is generally accepted practice in the private sector regarding defined benefit pension schemes. Your contentions that “Ordinary public service pensions are not funded from general taxation” and that “In 2009 they (pensions) cost €2.6 billion, but contributions were €3.1 billion, so the State made a €0.5 billion profit” indicates that you too appear wedded to the Pay-As-You-Go (Ponzi accounting) illusion. We (as citizens of this state) are building up a colosal liability which is increasing at a much faster rate than current payments suggest because (a) the number of public servants today (where liabilities are accruing) significantly exceeds the number of pensioners (where payments are being made), and (b) global policies of “financial repression” are reducing the real rate of return to pension funds and thus increasing actuarial estimates of the present cost of providing any future defined benefit pension. Cash payments to public service pensioners exceeded €3bn in 2011 (see link below — an estimate is added for local authority pensioners). Cash payments are up over 50% since 2006. The original terms of the Croke Park agreement provided for an ending of the link with earnings. In 2007 when an outfit called the higher remuneration review body (at least 2 of the 6 members were multimillionaires) recommended a 25% increase for the SG of the Department of the Taoiseach, his 3 living predecessors got the same rise. Subsequent cuts in salaries did not impact pensions and other bonanzas such as benchmarking and the first clawback was in last Dec’s budget. Brian Cowen caved -in to union demands to keep the earnings link. It should be noted that on these issues, both sides share the same self-interest. How often does the public interest win? Staff contributed €534m in 2010. The so-called emergency ‘pension-related deduction’ amounted to €916m. This is treated as an offset against pay ( it helps the Minister for the Status Quo to meet his pay ‘savings’ target.) The normal deduction amounts to 3.6% of pay and adding in the special deduction brings the contribution close to 10%. However, there’s no need to varnish the victims cross – – the funding cost is likely to be at least 20%. The C&G has estimated that the net cost of every additional year for a minister or judge is 62% of salary. The ‘legitimate expectation’ of extra years at the universities was like virtual money — all grand until it isn’t. http://per.gov.ie/wp-content/uploads/Analysis-of-Exchequer-Pay-and-Pensions-Bill-2006-2011.pdf (This report is usually published in July or August. The 2012 issue is not yet available) There were 130,595 pensioners in 2011 including 18,092 in local authorities, according to the revised spending estimates for 2012. There are about 2.3 full-time equivalent staff for every pensioner. @Cormac Lucey I don’t know why you describe pay-as-you go accounting as an “illusion”. Such a scheme can contiue indefinitely as long as the amount paid in matches the amouont paid out,(i.e.unlike a Ponzi scheme). Hence the importance of regular reviews to ensure that prospective outflows balance inflows. If they don’t balance, as Mickey Hickey points out, conntributions or benefits can be tweaked. to ensure balance. It is therefore wrong to focus on the net present value of future pension liabilities unless this is being done to emphasise the importance of regular reviews @ Cormac Lucey “global policies of “financial repression” are reducing the real rate of return to pension funds and thus increasing actuarial estimates of the present cost of providing any future defined benefit pension.” Is “financial repression” likely to continue for the next 30 years?As soon as the US economy picks up interest rates will be rising . I wonder what interest rates were used to arrive at the deficit. Not really off-topic, if you think about it. Another dollop of common-sense economics from Colm mcc: http://www.farmersjournal.ie/site/farming-Language-tuition-at-all-levels-of-education-needs-to-be-revised-15715.html @seafoid All actuarial assumptions should be clearly listed. Really, these days, actuarial reports should include a spreadsheet top allow the user to investigate the effects of different variables – not least the oft plucked out of the atmosphere, discount rates. Dave, A Ponzi scheme continues as long as contributors can be found to pay in enough to allow the insiders running the scheme to continue to pay out. Seafoid might have a point about inflated iiabilities but there is no DR above zero that makes the liability go away. I see no evidence that tweaking benefits is feasible. The pitchforks would come out and is only on this blog. The reality is that the PS pensions & SW liability combined are bigger than the costs of the bank bail out but there is very little debate. @Tullmcadoo The legislation to establish a new single public service pension scheme for new entrants has now passed into law. The changes will see new entrants’ pensions calculated on the basis of career average earnings instead of earnings at the time of retirement. New public servants will continue to pay pension contributions at existing rates. I see the IT have latched onto it in order to promote the advance spin before cuts to SW and education in the budget. http://www.irishtimes.com/newspaper/opinion/2012/1001/1224324666395.html davidc, I read that letter to the IT from the Retired Teachers, and should have replied to it, but didn’t. Anybody without a bias, and even many of those in receipt of them, will admit that PS pensions were very generous. In return for a cont rate of 6.5% over 40 years of rising salary, you got a tax-free lump sum of 1.5*final salary, and a DB pension of 50% of final salary. So many of your conts were on earlier lower wages, while the pension is based on final (typically higher) salary. Current staff have had a cut to gross pay, and pay a pension levy (PRD), so their (notional) conts have increased strongly. Meanwhile, exisiing pensioners have seen one (small) cut, the PRD. Taking teachers as an example: New entrants = 4 cuts Existing staff = 2 cuts Pensioners = 1 cut Where is the solidarity? PS pensions should be cut a second time. The key issue about this annual litany is that in a system where there is an 1850s vintage guarantee of employment, individuals also do not appear to be held responsible for serious breaches of public trust. I’m not saying that people should be summarily fired for incompetence or negligence but there should be sanctions and apart from the self-interested or fools, who would support keeping individuals in posts of responsibility where millions of euros on pubic funds are wasted? @Stephen McNena I know of actual examples (though I thought it was supposed to be forbidden these days) of retired teachers frequently coming back to their old schools to do substitute teaching work (paid for at the full daily rate naturally) while the newly qualifieds that the system has churned out when there are few to no jobs for the past 2-3 years are sitting by their phones every morning hoping that today will be the day they get called to do a sub teaching day. Those that retrained and qualified more than 3 years ago have of course given up hope by now and have either left the country, joined the dole queue or are doing something completely different. I have also seen plenty of examples of the rare times there has been a job on offer, there being over 400 applicants and several people being invited to interview when it was known all along that the newly qualified daughter of the principal’s best friend was going to be given the job. Don’tcha just love Ireland? It is such a meritocracy. Nothing ever happens at the OPW? In Ireland the interface between private property and the public sector is where much political corruption occurs. Two examples are the planning process and state commercial leases. The findings of the Mahon Tribunal were–”Corruption in Irish political life was both systemic and endemic”. In the Moriarty Tribunal the findings were ” What was attempted on the part of Mr Dunne and Mr Lowry was profoundly corrupt to a degree that was nothing short of breathtaking” Former Taoiseach Mr Haughey was a corrupt politician. Mr Haughey needed a million pounds per year to finance his lavish lifestyle. Many of Mr Haughey’s bagmen are state landlords–this was the pay back. Many Irish politicians families,friends and bagmen are state landlords. This is institutionalised political corruption. No other government in the world would sign these ruinous commercial leases. Once the state signed these leases it copperfastened them for all commercial tenants. The sovereign/OPW should have been a price maker and not a price taker. These state leases are sovereign bonds with the notorious ratchet rent reviews attached.The state landlords have bled the state dry using these ruinous commercial leases and wasted billions of Irish citizens money. The Irish commercial property market is an organised cartel who have imposed the most anti-tenant commercial lease law in the world on all Irish commercial tenants i.e. ratchet upward-only rent reviews tied to long leases. This cartel could not have existed without the state’s collusion. The rent arbitration system is systemically corrupt,where secret agreements,side agreements and other corruption is widespread. We are alone in the eurozone with this feudal commercial lease law. Reckless Irish banks lent tens of billions against these ruinous leases,not against the properties,and created the greatest commercial property bubble and bust in the history of mankind. Nothing ever happens at the OPW?. Comments are closed.