National explodes over an urgent billion dollar “time-bomb” funding requirement that wasn't disclosed before the election. “Ridiculous” says Labour. Who is right?
John Key is running the ACC’s billion dollar time-bomb story as hard as he can.
He accuses Labour of underfunding the Accident Compensation Corporation to the tune of “about a billion dollars” and has ordered a Ministerial inquiry to determine why the liability was not declared in the last Treasury pre-election economic and fiscal update.
“There are serious questions to be answered about this very large ticking time-bomb,” Key says. ”The previous government knew of the situation, but did not disclose this information prior to the election.”
“Ridiculous,” counters Labour’s new ACC spokesperson David Parker, claiming that his government simply acted on officials’ advice and in accordance with constitutional procedures in an election period.
Both Key and Parker point to a Department of Labour “aide memoire” to prove their points.
The first point to emerge from the official’s memo is that the Accident Compensation Corporation is going to need $297 million by March next year, and similar sums over the next three years – not a billion dollars upfront.
The extra funding is needed to cover unbudgeted costs in both the ACC’s Non-Earners’ account, which is funded from Government appropriations, and the Non-Earners’ portion of the Treatment Injury Account (TIA), which meets the cost of entitlements for personal injury caused by treatment from a registered health professional.
The need for extra funding is driven by increases in medical treatment, social rehabilitation, and ambulance costs, and because the Non-Earners’ portion of the TIA had been – as the officials quaintly put it – “funded on an informal basis without a clear policy” prior to this year.
For this year’s Budget, officials were directed to develop a clear policy. They decided that provisioning for Non-Earners’ claims on the TIA should be aligned with the ACC’s general policy and that post-2001 Non-Earners’ claims should be fully-funded on a three year basis.
Result: the TIA is now under-funded by $204 million, and $75 million is needed to bridge that part of the gap in the current year.
In short, the Labour-led Cabinet knew in December last year that there was a problem with the funding of Non-Earners’ claims.
At the end of June, a valuation of the ACC’s outstanding claims liability indicated that more Government funding was needed. Officials at The Treasury were informed of the situation, according to the Department of Labour.
Under normal circumstances, the Labour-led Cabinet would have had a paper on the issue when they considered a Budget Update in October – but the Budget Update deadline was brought forward this year, because Treasury needed time to produce that precious pre-election economic and fiscal update [PREFU].
This meant ACC actuaries did not have time to calculate the appropriations required to cover the Non-Earners’ funding shortfall to meet the Cabinet’s early deadline. What to do?
The Department of Labour’s aide memoire gets a bit vague at this point.
First, it says: “The former Minister [Maryan Street] agreed that the Cabinet paper instead be aligned with the [ACC] levies paper in December 2008”. It also states that “formal advice was provided in the form of a letter from the Minister for ACC to the Minister of Finance on 22 October 2008.”
Then it says: “Because the issue is of significant consequence, the Department subsequently advised the former Minister to wait until after the General Election to present the proposed increase in appropriations to Cabinet.”
The Department of Labour suggests that the delay was in line with advice provided in a Cabinet Office Circular on Constitutional Procedures in the election period.
The Department also suggests that the requirement for an extra $297 million this year was not included in The Treasury PREFU “because The Treasury forecasts do not include allowances for Cabinet decisions which have not yet been made.”
That explanation does not square with The Treasury’s explanation of the way it deals with fiscal risks in the PREFU. Its criteria for disclosing specific fiscal risks are “reasonable certainty”, “materiality”, and “active consideration”.
“Materiality” is established when risks have an impact on the fiscal forecasts of $10 million or more in any one forecast year.
“Active consideration” is established when risks are being actively considered by the Minister of Finance and responsible Ministers [eg. are the subject of written reports] or are decisions that have been deferred until a later date.
True, the Minister of Finance was not given formal advice until 22 October and The Treasury PREFU text was finalized on 26 September. However, if The Treasury was kept as well informed as the Department of Labour suggests, it would have known as early as June that a significant additional appropriation of funds would be needed by the ACC.
There should have been some reference to the ACC’s requirement for additional funding in The Treasury PREFU and there are no constitutional reasons for keeping it quiet.
Key is right to demand explanations about the absence of any disclosure in the PREFU.
Parker is wrong when he says Nationals’ claims that Labour “covered up ACC cost increases are ridiculous”.
Key has yet to call it a cover up. Perhaps he will – once he learns precisely when and how much ACC Minister Street and Finance Minister Cullen had been told about the ACC’s funding requirements before The Treasury PREFU was finalized at the end of last September.
Comments (15)
Thanks for this excellent summary.
I wonder what other little fiscal surprises are about to come out of the woodwork. Are ther any SOEs not doing to well and needing deficits topped up?
National's being a bit precious. Key knows full well that he has the option of getting the account into a fully funded state over a much longer period (say, $100mn a year over ten years). But that doesn't sound nearly as serious as $1bn, does it. Anyway, the non-earners' account has always been funded inconsistently, by both parties. Much ado about nothing.
The real story is that National is intent on privatising the world's most efficient accident compensation scheme, which will result in major increases in levies for all. Why? Dunno.
Hello! Here's anothe leftie illiterate who thinks the word 'competition' is spelt with a P.
If he knew anything about insurance, which he appears not to, he would know that risks wait not upon the tardy funder.
Further to last and just to brighten David Paul's dreary day, here's the real deal on National's secret agenda.
David what we're going to do is carefully assess all the SOEs and those which are performing well will be called 'assets' and those underperforming will be reclassified as 'liabilities.' That's how you run a business, see?
Then we'll sell all the bloody liabilities and use the proceeds to fund ACC shortfalls and more tax cuts.
Yippeeeeee! ! ! ! l
The basic problem here is that a significant, material fiscal risk was known to exist in the ACC Non-Earners' and Treatment Injury Accounts. It should have been disclosed in the Pre-Election Economic and Fiscal Update - and it wasn't. Error or cover-up? We deserve an answer.
But since the "P" word argument is running, when did opening up a service provided by a State-owned monopoly to some private enterprise competition become privatisation?
when did opening up a service provided by a State-owned monopoly to some private enterprise competition become privatisation?
Hasn't it always been? For good or ill, a service previously provided by the state will be provided by the private sector. It's not a 'state asset sale', but isn't it the essence of privatisation?
I am employed, my employer is required to pay money to the Government (ACC) to cover me for earnings and rehabilitation if I am injured at work. If I am injured the Government (ACC) pays me money (80% of wages?) while I'm getting better.
After the opening up to competition, my employer opts to go with a private insurer, instead of ACC. I still receive rehabilitation, and payment of some of my wages, but instead of coming from the Government (ACC) it comes from a privately-owned insurance company.
Money that used to come from the Government, now comes from a private insurer...
Partial-privatisation might be slightly more accurate, but if the private sector doing something the Government used to do isn't privatisation, the phrase has become pretty meaningless.
I think what we have here re the dreaded 'P' word is some confusion.
ACC the SOE is not being privatised.
The ability to provide the service currently provided on a monoply basis by ACC is being opened up in certain areas to competition. Now you might wish to call that privatisation or something else, but it is not the privatisation of ACC.
David Paul. How's your 'world class' ACC system looking now that a few minutes ago ANOTHER $1.4 bil shortfall has been discovered in the EARNERS' account?
Your mates in Labour were campaigning on reducing earner premiums. Now, tell me how that works when officials are recommending an increase from $1.40 to $2.00.?
I call that a culture of lies and deceit. Labour doesn't need a post mortem on their defeat. All they neeed to do is learn to stop telling lies.
Graeme you are being obtuse.
Telecom was privatized. It was sold off, lock stock and barrel. Allowing private insurers to compete with ACC is not privatization, nor is it partial privatization, for if they cannot perform better and smarter than ACC then nobody will leave ACC and they will all go home licking their wounds. If I remember rightly, the last time private industry got a sniff at our workers' comp market premiums came down with a thump until the socialists got back into power and quickly sent them packing. They won't even look at us again unless they are given some legislative protection against the sorry days those idiots ever get back in again.
Graeme you are being obtuse.
Telecom was privatized. It was sold off, lock stock and barrel. Allowing private insurers to compete with ACC is not privatization, nor is it partial privatization, for if they cannot perform better and smarter than ACC then nobody will leave ACC and they will all go home licking their wounds.
The last National Government also opened ACC up to competition, and the Labour Government that followed it closed down that competition.
They didn't buy the insurance companies that were offering ACC products, and they didn't forcibly acquire them. They just changed the rules so that they couldn't compete.
And people didn't just call that closing down competition, they also called it nationalisation.
We're to investigate doing the opposite now, and I think I'm on pretty safe ground in using the opposing word to decribe it.
Graeme, I'm not much interested in what other people called something eight or ten years ago. I'm more interested in your use of their inaccurate description of 'nationalisation' to justify your false accusation of privatization.
And have you noticed that since Mr Beatson wrote this piece the ACC blowout has escalated to $2.5 billion. You should read this morning's Herald which details the potential jail time Mr Cullen and faces for his crimes under the Public Finance Act. Mr Whitehead who also signed off would have been under the thumb.
This is serious stuff and I hope Cullen is prosecuted.
To be clear on National's policy re ACC and competition, here it is:
With this in mind, National supports the introduction of competition and choice to the ACC Work Account (covering employees and the self-employed at work).
No, the word privatisation isn't mentioned, but of course it wouldn't be. Perhaps we should talk about part-privatisation of the sector. Certainly it wants to take a service or sector monopolised by government and open it to private companies.
What's clear is that National has never had a hidden agenda on its Work Account policy. What's unclear is whether this sense of crisis around increasing levies is the opening gambit in a push for greater reform.
If I remember rightly, the last time private industry got a sniff at our workers' comp market premiums came down with a thump until the socialists got back into power and quickly sent them packing.
I'm replying to Adolf's comment reluctantly, not wanting to inflame him further. But, no, Adolf, what actually happened last time is that the National government set the rules in such a way that the private providers didn't have to fully fund. Neat trick, eh. And, the private providers were going through a start phase of client-base development, resulting in lower than long-term rates.
But all this is irrelevant. All unbiassed analyses show that ACC is more efficient than similar organisations by a factor of three or four. Yep, three or four. And those similar organisations of virtually all run by private providers. No brainer?
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