The Annual Report on State Finances (ARSF) reports on the State’s annual financial results and financial position and explains significant variations from the prior year and from the annual budget estimates. The Department of Treasury prepares the ARSF and we audit key aspects under the Government Financial Responsibility Act 2000.
The ARSF brings together key financial information for the 3 sectors of government as shown in Figure 8. In addition to this consolidated financial reporting, each entity also prepares and tables its own annual report that provides detail of its individual finances.
We issued a clear (unqualified) audit opinion to the Treasurer on 25 September 2018. The audited ARSF was released by the Treasurer on 26 September 2018, meeting the statutory reporting deadline of 28 September 2018, or 90 days after the end of the financial year.
Included in our auditor’s report was an Emphasis of Matter (EoM) paragraph to alert readers to a correction of overstated land valuations in previous years that is disclosed in the ARSF. Our EoM advised that Appendix 1, Note 3(y) of the financial statements explains an overstatement of $3.9 billion in total public sector land values and the related revaluation reserve.
Timely and efficient preparation of the ARSF by Treasury and its audit by us is dependent on entities submitting accurate year end financial balances to Treasury on time.
It was a concern that 36 entities submitted June actual financial data to Treasury after the deadline of 24 July, compared to 26 late submitters last year. Late submissions reduce the time for Treasury to review entities’ balances and increases the risk of undetected errors.
This section of our report provides information that supplements information contained in the ARSF that Parliament and other readers might find useful:
- net operating balance for General Government and for the Total Public Sector
- infrastructure renewal ratio
- borrowings and unfunded superannuation
- debt sustainability
- total borrowings and expense commitments
- current trend in leave liability balances.
Net operating balance
Figure 9 shows the net operating balance for the General Government Sector and the Total Public Sector. A large number of factors affect the result, including economic circumstances, the performance of the State’s main industries, interest rates, Commonwealth funding and legislation. However, a surplus is generally an indicator of sound financial management and/or good budgeting.
Governments face an ongoing challenge to maintain existing infrastructure and also develop and provide new assets to achieve desired social, economic and environmental outcomes.
The infrastructure renewal ratio is an indicator of the rate at which existing infrastructure is being replaced and increased compared with the rate at which it is being used up. The ratio compares the annual expenditure on assets with the annual depreciation charge on assets. A ratio higher than 1.00 indicates that overall the State’s infrastructure is increasing.
Infrastructure assets mainly include land, roads, ports, water and electricity assets and networks, hospitals and schools. These represent almost the entire balance of non-financial assets. In 2017-18 the value of non-financial assets for the Total Public Sector decreased slightly, from $154.2 billion to $153.5 billion. The 2017 balance was restated following correction of overstated land valuations in previous years.
Figure 10 indicates that although infrastructure renewal is slowing, it remains above the ratio of 1.00.
The infrastructure renewal rate is a high level indicator and caution is needed when interpreting the results. For example, this indicator does not inform on the extent to which maintenance of existing assets is prolonging their useful life.
Borrowings and unfunded superannuation
Information on the State’s debt is contained in the ARSF. Borrowings and the State’s unfunded superannuation are significant components of this debt. While the superannuation liability decreased in 2017-18, borrowings continued to increase.
The ARSF contains important information on the State’s net debt. In Figure 12, we have reported another commonly used high level indicator relating to debt, the ‘Debt Sustainability’ ratio. In this graph, the debt sustainability ratio is the value of borrowings and unfunded superannuation liability of the Total Public Sector as a percentage of gross state product (GSP).
It should be noted that measuring sustainable debt is difficult as the ability to pay debts involves factors such as economic growth, interest rates and the capacity of the State to generate surpluses in the future. As debt is repaid over a long period, these factors cannot be forecast reliably.
Based on this indicator, the State’s ability to meet its debt obligations improved this year.
Total borrowings and expense commitments
Figure 13 shows the trend in the State’s borrowings and commitment to future expenditure. Overall this year, Total Public Sector borrowing increased by $1.4 billion while expenditure commitments reduced by $4.3 billion, resulting in a combined total reduction of $2.9 billion.
Expenditure commitments at 30 June 2018 include $37.2 billion for private sector contractors for long term contracts providing health services, and rail and bus operations. Capital expenditure commitments account for $3.4 billion including road infrastructure, health campuses, schools, housing, land development, waste and waste water projects as well as information technology.
The total public sector annual and long service leave liability owing to employees increased by $52 million to $2.9 billion during 2017-18. This is a reversal of the recent slightly declining trend which was largely driven by voluntary severance schemes being taken up by public sector employees, many of whom had been long serving staff.
Management at entities need to proactively manage their leave liabilities. It is important for staff to take regular leave for their health and wellbeing, and for the entity to develop staff to perform the tasks of others. It should also be noted that fraud can be more easily concealed by staff who do not take leave.
Management should continue to closely monitor leave plans to ensure that staff schedule and take leave each year and, where appropriate, allow staff to receive a cash payout for part of their leave, rather than accumulating large leave balances.