Awash in PLP debt: Bermuda is in denial to coming Depression

by Sal | June 7, 2010 at 01:57 am

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6/4/2010 11:56:00 AM
Finance Minister's revenue projection is pie in the sky

Government revenues 2007 to 2010

Actual Revenue in 2008/09
$952,866,165
Up 2.62 per cent on 2007/08
$24,366,311 more

Revised estimate for 2009/10
$934,159,000
Down 1.96 per cent on 2008/09
-$18,797,165 less

Estimate for 2010/11
$1,058.3m
Up 13.34 per cent on 2009/10
$124,652,000 more. Really?

For 2008/09, as set out in the Financial Statements of the Consolidated Fund for 2008/09 and 2007/08. For 2009/10 and 2010/11 as set out in the February 26, 2010 Budget statement.

Larry Burchall

Ministers of religion deal with the God in the sky. Ministers of Finance, some of them, deal with pie in the sky.

From 1998 to March 31, 2003, Government spent less than it took in in taxes and fees.

For five consecutive years, Government had an annual surplus.

Starting April 1, 2003, Government began spending more than it took in. In 2003, Government spent $10,000,000 more than it took in in taxes and fees.

But the cash surpluses built up over the previous five years meant there was surplus money to ‘burn’.

Things changed. In 2004, Government spent $26.3 million more than it took in.

In 2005, it spent $31.8 million more. In 2006, $68.9 million. In 2007, $94 million. In 2008, $254.9 million. In 2009, $247.4 million.

Over-spend

For seven years, Bermuda Government’s spending grew much faster than slower-growing Bermuda Government revenue.

In the February 2010 Budget statement, Minister for Finance Paula Cox planned to spend $1,134,700,000 against a hoped-for Government income of $1,058,300,000.

The Minister planned an over-spend of $76,400,000.

This 2010 over-spend is back to the over-spending level of 2006 but not back to the balanced spending level of 2003.

I do not argue with the Minister’s spending plan. It is the Minister’s Parliamentary right and national duty to make spending plans and then spend as the Minister sees fit.

Spending is under the Minister’s absolute control.

Of course, that does not mean that a spending decision is good, best or even right.

As always, time and consequences will determine that.

Time and consequences are now determining the value of the decisions made by Ministers for Finance in Greece — and the consequences in Greece are plain for all to see. I disagree with the Minister’s revenue projections.

Revenue is not under the Minister’s control.

The Minister can raise taxes and impose higher fees but those actions may not result in actual higher revenue to Government.

For example, an increase in payroll tax rates can cause job losses.

Fewer people working means fewer employees pay payroll tax.

With fewer people working, the overall impact of the payroll tax increase might be to increase unemployment and thus decrease total payroll tax collected.

A 40,000-person workforce returning a pre-increase payroll tax revenue of $400,000,000 can, with job losses, easily become a 38,800 workforce — three per cent fewer — returning an after increase payroll tax revenue of $400,000,000, which means no increase in tax revenue.

The ultimate consequences of this Ministerial decision? An increase in unemployment and living expenses.

If Government provides a social welfare safety net in the form of financial assistance, there also has to be an increase in the Government expense of financial assistance.

In layman’s language, the consequence of the Ministerial tax increase decision is a ‘boomerang expense’.

No Minister for Finance can fully control Government revenue.

For 2010/11, the Minister for Finance projected that Bermuda’s economy would “return to positive growth in 2010, perhaps in the range of one per cent (page two, February Budget statement)”.

That projection is Ministerial pie in the sky.

To achieve even one per cent growth, there must be no reduction in the international business sector.

This sector now contributes more than 80 per cent of our foreign exchange and drives or underpins more than 70 per cent of all economic activity on this island.

National income from tourism, currently in deep doo-doo and struggling to provide nine per cent of our foreign exchange, must not fall further than it fell in disastrous 2009, when income from tourism plummeted 17.6 per cent.

Page six of the Ministry of Finance’s Economic Report (on 2009) says: “International business, business services, hotels and construction accounted for 1,005 job losses” but there was growth in “education, health and social work (347)”.

So there was no growth in the private sector but there was growth in Government.

This pattern of growth is completely unsustainable. It creates false economic growth.

Eventually, all Government funds come from the private sector, either from individuals who work in the private sector or companies and businesses operating in the private sector.

For real growth in 2010, there must be real increases in tourism income (not just in tourist arrivals), real increases in employment in the international business and business services sectors and no further reduction — in fact a material increase — in private sector-funded construction.

This is what it will take to achieve growth of just one per cent.

Some Ministerial decisions operate against growth. The decision to raise payroll tax and approve other general cost increases is such a decision.

It is acting as a brake on the private sector’s ability to grow.

Government’s general attitude towards inter-national business is not expansive and welcoming.

It is tinged with xeno-phobia and ringed with restrictions. There is little real incentive for international business to expand its Bermuda footprint.

This is noticeable and has already had an impact.

International business shed 72 jobs in 2008 and dropped more than four times as many (328) in 2009.

In 2010, if this slide continues, there will be further international business job losses and real, as well as relative, decreases in payroll tax and some other fees to Government.

This will happen despite the Minister’s recent 14 per cent wrong time rise in payroll tax.

Also, there may be a slight dip in total foreign exchange earnings. Given all that, between April 1, 2010, and March 31, 2011, it is highly unlikely the combination of tourism and international business will provide the 13.3 per cent year-on-year Government revenue increase the Minister projects in the February 26 Budget statement.

Instead, 2010 could be another year of negative growth, as happened in 2009 when the “economy is likely to have contracted by as much as 2.5 per cent (page two, Budget statement).

Crisis

Given that the Budget statement is prepared by exactly the same people who, between 2007 and 2010, made the $613 million debt blooper, set off the ‘Operation Desperation’ overdraft crisis and created today’s need for the $500 million sovereign bond issue, I do not believe, nor do I have any worthwhile evidence, that their projection of a one per cent increase has any merit. Their projection is pie in the sky.

However, it is the Finance Minister who bears final and personal responsibility.

Reality? In 2010, Bermuda’s economy will likely be further mashed up by, and because of, the recent faulty financial planning, bad money management and execrable decision and policy making.

Change the money managers. Change now.

Related Stories: • Govt's $500m bonds sale pushes us deeper into debt • Gov't must stop hiding BDA's debts from taxpayers
Related Links: • 2010 Budget documents
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from Politics.bm by Christian Dunleavy
"Don't overlook that Bermuda's currency is effectively worthless. It is not backed by any assets and cannot be freely traded off the island. Couple that with how Bermuda's GDP is calculated, which includes a large contribution of profits of IB, which reduces as each company redomiciles and the profits are consolidated where the parent is now domiciled, and the picture is exceedingly bleak."

Term limits, anti-Bermudians laws such as licensing your spouse and the real estate limitations, an increasing pace of overspending amid declining revenues, continued focus on irrelevant dogma like independence will be the death of Bermuda.

The PLP have taken one of the most vibrant economies in the world, with budget surpluses and surplus employment and completely reversed that.

Events in the UK should serve as a warning to Bermuda about what unbalanced and unsustainable Government spending can do to an economy and the future:

The prime minister laid the blame for the situation squarely on what he called "reckless" spending by the Labour government, which was in power for 13 years before being defeated in last month's election. He said that as the financial crisis was "Labour's legacy," so, too, would be the spending cuts.

"Nothing illustrates better the total irresponsibility of the last government's approach than the fact that they kept ratcheting up unaffordable government spending even when the economy was shrinking," he said.

Labour argued that spending would help boost the economy, Mr. Cameron said, "conveniently forgetting that if you start with a large structural deficit, ramping up spending even further is likely to undermine confidence and investment, not encourage it."

Larry Burchall has been doing yeoman's work laying out the bleak financial picture the PLP has put us in. But in case you're feeling comforted that Bermuda's debt is nowhere near the size of the UK's GBP 771B (USD 1.116B at today's exchange rate), let me disabuse you of that notion.

UK Debt = $1,116.0B
UK Population = 6,141,4062
UK Per Capita Debt = $18.117

BDA Debt = $1.0B
BDA Population = 65,000
BDA Per Capita Debt = $15,385

Not so fast. I haven't included the imminent $500M bond issue, nor the imminent budgeted $400M hospital redevelopment which they're trying to hide off balance sheet with a Public Private Partnership.

Throw that extra $900M in and the debt almost doubles to 29,000 per capita. That's 60% higher than the UK's.

But unlike Bermuda, the UK has monetary policy options. They have a central bank and can print money and play with interest rates (not that it will make the debt go away).

Another brilliant Burchall report,that should be mandatory reading in all schools and govt. offices. Bermuda is going to be paying and cleaning up the Brown stuff for generations.

Threats to shut down the media,and the constant stirring up of racial division are a smoke screen for the looting of the treasury.

Bermuda is now circling around the drain faster and faster.

Inflation is creeping up,creating a further increase in unemployment and living expenses.

PLP wasteful tax and spend govt. has crippled tourism,killed retail and left a broken bitter racial legacy under Ewart Brown.

After 12 years in power the PLP has almost totally destroyed Bda Inc.

All this at the worst possible time: during a world wide depression, and the Gulf oil spill.

The following statistics alone should make you vomit:

* Discounting the $211 million in Guarantees, Bermuda added $613 million in debt in just the past three years.

* This is an average of more than $200 million overspent every year for three years in succession.

* It is a $500,000 mistake repeated every day for 1,200 days in succession.

To cover its past sins and mistakes, Government is selling $500 million of Bermuda bonds. It means Government will stay with a $60,000,000 overdraft facility

Not even God could stop the PLP & Ewart Brown from plowing Bda. Inc. into the ground.

Bermuda’s Economy and dysfunctional social ills are going to get very ugly as the world economy sinks . Led by an elitist plp political machine that refuses to rein in a corrupt clique's looting and rape of the treasury ,EB and his pals will ruin what's left of Bermuda’s reputation and economy.

The Third Depression By PAUL KRUGMAN

The recession killed off 7.9 million jobs. It's increasingly likely that many will never come back.businesses have slowed their pace of hiring to a relative trickle.

UPDATE:

Employment survey shows jobs decline

Jobs in Bermuda fell by nearly 700 between 2008 and 2009. The number of jobs held by Bermudians decreased by 391 in that period,

The chickens are coming home to roost,after 12 yrs of corruptocrats looting & raping Bda Inc, now ECONOMIC VIOLENCE will leave many more victims than gunshots

appalling news today that the Finance Ministry has been blocking the Auditor General's constitutional access to the Financial Information Management System for two weeks - and quickly rectified once the Auditor General went public.

This is intolerable. Not to mention unconstitutional.

Government is now trapped in a debt vice
... and the only way out is to increase taxes and cut services

Larry Burchall

The government over-grew, over-spent, and over-borrowed. Now under-handedness has been added.

The consequences of this combination of bad actions will be that Bermuda will suffer a prolonged economic recession.

The recession will happen because government expenditure on Civil Service pay and on the delivery of government services such as Financial Assistance, health care, and so on... will continue to decline (see my June 30 column).

Government expenditure will decline because government must first shave a few cents off every U.S. dollar that it takes in — before that dollar is re-spent.

Government will try to get around this shaving-off of cents by increasing taxes. But, carried too far, tax increases stifle business and cause employment to contract, thereby shrinking the tax pool. The employment shrinkage happens because, in order to stay profitable, companies must shed labour, which is what BTC has done.

Of course, the only government response to employment shrinkage is — you guessed it! — increase taxes!

This government, with this Finance Minister in charge, is now well down this road of tax increasing and reducing spending.

Because this government spends more than it receives, it is forced to borrow cash from overseas lenders. This borrowed cash is coming at an ever-increasing expense. To meet this ever-increasing expense, this government is — you guessed it! — increasing taxes. Then it is cutting expenditure on services, with this cutting both inevitable and consequential.

Because of past and continuing bad financial and economic management, this government is now trapped in a debt vice. Keep this Minister and the vice will tighten. We will see and feel the consequences as we find ourselves paying increased taxes and fees; and as we notice that spending on government services is declining.

All of us will see and feel that.

In the midst of all this inevitability and lining up of consequences, there is also this thread of under-handedness.

A year ago, between 21 May and 30 June 2009, the Minister for Finance went to the overseas capital markets and borrowed $175,000,000.

Between April 2009 and now, the Minister never made a Ministerial Statement that showed that she had actually raised that money.

In a Ministerial Statement in December 2009, the Minister did say that “…net Public Debt increased by $204.9 million (2008 - $80.5 million) during fiscal 2008/09, standing at $483.3 million at the end of the year.”

But she never explained how she had financed that $204.9 million. The Minister has never told us or explained why the interest rates were as much as two percentage points higher than rates charged in 2005 for similar duration loans.

Funding gap

Anyone reading and analyzing the February 2010 Budget Statement — as I did — would see that the February 2010 Statement showed a ‘funding gap’ of about $383,464,000 between what the Ministry shows and what the Minister tells.

Ministry papers show $210.8 million in paper Guarantees (BNTB, Education, WEDCO); $415 million in Senior Notes and Loan Facilities; and $175 million in Senior Notes taken up in May/June 2009. Put all the ‘notes’ together, add the Guarantees, and then take away the $82.8 million in the Sinking Fund; you end up with $718 million in identified Debt.

But the Minister tells of $1,101.4 million as Debt. That leaves $383.4 million not accounted for by way of Notes or other stated loan facilities.

Even as I write and you read, this naked $383.4 million sits with HSBC (Bermuda) as ‘unsecured loans’ or overdrafts or bridging loans or cash advances that are not showing up — have not yet shown up — in any Government Financial Statements; or in any Ministerial Statements. At the minimum, the Minister has to issue Sovereign Bonds to cover this naked $383.4 million ‘cash gap’ (see below).

Every failure to properly account for funds is bad. In the corporate world, it inevitably leads to business failure. In the investing world, it allows people like Bernie Madoff, Allen Stanford, Dennis Kozlowski to steal; allows firms like ENRON to hide; and firms like TYCO to be defrauded.

So here we are. Bermuda has a Finance Minister who has been largely silent on primary matters of public accounting, national debt, and recent or planned large borrowings, for more than a whole year.

A Finance Minister who, as demonstrated by her continuing silence, has taken a ‘keep quiet’ approach to financial management.

Keep silent. Say nothing about money. When questioners get too close, distract with stuff about overseas conferences, TIEAs, small business development...

Meanwhile, keep looking calm and cool.

This Minister may believe that silence is her best defence. But doesn’t this Minister know that not even silence stops the arithmetic of numbers?

Our naked debt

2005 Notes at average 5.6% Interest: $215,000,000 (Cash)
Loan Facility - LIBOR - 1.5% Interest: $200,000,000 (Cash)
2009 Notes at average 7.07% Interest: $175,000,000 (Cash)

Total (gross) Cash borrowed supported by paper: $590,000,000 (Cash)

LESS Sinking Fund: $82,810,000 (Cash)

Total (net) Cash borrowed supported by paper: $507,190,000 (Cash)

Guarantee – BNTB: $200,000,000 (non-cash)
Guarantee – WEDCO: $10,000,000 (non-cash)
Guarantee – Educational loans: $800,000 (non-cash)

Net Total of all Notes and Guarantees: $717,990,000

Budget Statement of National Debt (Page 34): $1,101,454,000

Debt not yet covered (naked debt): $383,464,000 (naked cash)

National debt by year

1999: $163.5m; Minister: E. Cox; Premier: J. Smith

2000: $162.3m; Minister: E. Cox; Premier: J. Smith

2001: $161.1m; Minister: E. Cox; Premier: J. Smith

2002: $160.0m; Minister: E. Cox; Premier: J. Smith

2003: $160.0m; Minister: E. Cox; Premier: J. Smith/A. Scott

2004: $160.0m; Minister: E. and P. Cox; Premier: A. Scott

2005: $175.0m; Minister: P. Cox; Premier: A. Scott

2006: $225.0m; Minister: P. Cox; Premier: A. Scott/E. Brown (Carpetbagging begins....)

2007: $255.0m; Minister: P. Cox; Premier: E. Brown

2008: $345.0m; Minister: P. Cox; Premier: E. Brown

2009: $535.0m; Minister: P. Cox; Premier: E. Brown

2010: $679.0m; Minister: P. Cox; Premier: E. Brown

Our debt crisis verges on catastrophe -Stuart Hayward
981.9 million of debt has been added over the past seven years —more than 800 per cent.

As my fellow columnist Larry Burchall has pointed out, 92 per cent of this new debt was incurred in the past five years.

Now we learn Government is looking to incur an additional $500 million in debt through the issuance of bonds.

It will cost us $249,000 PER DAY to service the total debt — about 10 times the debt service cost we paid out daily in 2004.

How many affordable homes,senior prescriptions & health care costs would $249,000 PER DAY provide?

Bond sale an 'expensive exercise' for Bermuda, claims UBP's Richards

"Everyone has to understand that this issue is just a handling of the debt that already exists," "the Government was trying to make it out as some sort of success, but really it is just taking short-term debt, bundling it up and making it a long-term debt." "If we don't stop the rot now, one day…there will be a day of reckoning.

Shame the Government blew almost a $100M on Berkeley and the cruise ship terminal isn't it?

Opinion
Dr. Brown's towering legacy: a mountain of debt

Larry Burchall

On November 1, 2010, Premier Dr Ewart Brown won’t be Premier. He will have saddled up and ridden off into the sunset of his 17-year political career. He will have to ride for many miles before he gets beyond the long and still lengthening shadow cast of the still growing mountain of the legacy he created during his four years as Bermuda’s ninth Premier.

Premier Dr Ewart Brown will leave behind him a $970,499,438 mountain of additional National Debt - and four Uyghurs without passports.

There is only a white gash in the ground at the old Holiday Inn. Par-La-ville is still just a car park, not a Ritz or a Four Seasons. Elbow Beach Hotel has downsized. Pink Beach Cottage Colony is in receivership. A cruise ship sometimes moors offshore at St. George’s. Maxi-cruisers tie up at the new, high-cost Dockyard. Low cost carriers WestJet and JetBlue now fly here; but tourists arriving by air declined 23 per cent (70,000 fewer) during his seven-year tenure as Tourism Minister. The taxi industry is relatively unchanged from 2005. Bullets are flying and bodies are dropping faster than has ever happened before. Getting a car through TCD is faster than it used to be.

A legacy is like the cave etchings scratched out and coloured by those unknown cave dwellers who lived 10,000 years ago. Or like un-erasable historical events. A legacy is not always what a man wants. A legacy is what it is.

Finance Minister Eugene Cox’s legacy is that by March 31, 2004, Bermuda’s National Debt had been lowered to $119,500,562. National Debt Interest and Sinking Fund costs were less than $25,000 a day.

Sidekick

Today, after taking up that $500 million in Sovereign Bonds, Bermuda’s ‘cash debt’ now stands at $1,090,000,000. Of the total debt added, $916,573,744 came during Dr. Brown’s four years in office. Of course, Premier Dr. Ewart Brown did not create that massive mountain of foreign dollars all by himself. He had help.

His mountain-building sidekick was Finance Minister Paula Cox. Faithfully, she stood and worked by his side, shoveling as hard and as furiously as Premier Dr. Ewart Brown ordered. Together, the duo poured out public funds far faster than those public funds came in. Together, making full use of the tools of smooth or convoluted rhetoric and political or racial distraction, they concealed their fast growing mountain of debt.

The debt-building pair did not work alone. They were aided by an easily convinced and extraordinarily gullible band of supporters who — as they both seemed to know — were willing to believe anything that they were told, as long as the right person, using the right tone of voice, standing in the right place, and uttering the right words about race and the past, presented a set of easily digestible and acceptable facts.

Now that mountain of proof of bad decisions, bad policy, bad control, and bad management sits before our eyes. A mountain of unnecessary debt. It sits brooding and silent. It sits there sucking back its daily portion of interest costs; $225,000 a day in total national debt service charges. This is nine times higher than it was when Finance Minister Eugene Cox handed over, and every cent of this debt service has to be paid in U.S. dollars that Bermudians must first earn.

That $916,573,744 mountain of unnecessarily and unwisely added Brown-Cox debt now saddles Bermuda’s shrinking economy. This Brown-Cox debt is a mountainous monument to mismanagement.

PLP Government money mess includes $1bn in wrongly handled funds

Larry Burchall

Each year, the sentence starts: “Supplementary estimates are required by the Bermuda Constitution Order 1968 for expenditures in excess of amounts appropriated.”

This may sound boring but these words are like the crosses and diagrams on an old pirate’s map retrieved from a trunk in some cobwebbed attic.

Those diagrams could lead to long-buried treasure. Those boring words lead to a trove of information uncovering the soiled underpants of Government’s accounting and management processes.

What those words mean is that if Government “appropriates” (in other words budgets) $900,000,000 as planned expenditure but actually spends $950,000,000 ($50,000,000 more than planned), then Government must go back to Parliament and make a request for additional funds (a supplementary estimate) and get the Constitutional authority to spend those funds.

So if Government overspends the additional and un-appropriated $50,000,000 without going through the process of a supplementary estimate, and thus without getting the approval of Parliament, the spending is actually unlawful and unconstitutional.

This does not mean the police are going to slap handcuffs on the Minister for Finance and some civil servants and haul them off to court.

Wrong

The law that has been broken is not that kind of law and, while perhaps they should, the police do not slap handcuffs on politicians every time they do something wrong.

Instead, what has happened is that a process or procedure has gone wrong. That is always bad.

When military processes like safe weapon handling go wrong, soldiers are killed by ‘accidental discharges’. When medical processes go wrong, patients get killed by wrongly prescribed medicines or by overdoses of correct medicines. When Constitutional processes go wrong, people’s rights and freedoms are taken away or well-designed checks and balances do not work as intended.

Since 2006, with Minister Paula Cox in charge, a financial process has gone, and stayed, wrong.

Between April 1, 2005, and March 31, 2010, Government’s own financial statements show that Government budgeted, that is appropriated, $4,513,000,000.

In the same period, Government says it spent $5,403,000,000, which means an overspend of $890,000,000.

This means Government should have put in supplementary estimates of $890,000,000 to cover and thus properly authorise the “expenditures in excess of amounts appropriated”.

But Government’s own financial statements show it has only gone back to Parliament for supplementary estimates for a five-year total of $160,000,000.

This means Government has overspent $730,000,000 — money it has not authorised itself to spend.

This is clear evidence that the proper process has gone wrong and is not working as intended.

The unauthorised $730,000,000 is increased by the financial shenanigans that have taken place since March 31, 2010, and which now includes the borrowing of $500,000,000 in sovereign bonds.

Now, there is more than $1,000,000,000 of improperly handled Government funds.

The whole process of Government financial management is in chaos.

The financial statements for financial year 2009/10 should be withdrawn.

The Auditor General should demand a complete reassessment and subsequent restating of the true national financial position for that year.

She should also require that proper spending authority should be proven to be in place for all expenditures that have been made — and that the Auditor General is asked to comment on. If this does not happen, the Auditor General should refuse to sign off on the 2009/10 financial statements and should demand higher accounting standards and correct legislative requirements for the current financial year.

Despite their neatness, Government’s ‘books’ are a mess.

In a private corporation, the whole accounting section would be fired, impartial outside auditors would be called in and new accounting processes would be rammed into place.

Handcuffed

Bermuda’s Auditor General is dealing with a broken process.

The Auditor General needs to demand that only proper methods and processes will be acceptable to her office.

Should she fear being handcuffed and carted off like her predecessor?

Perhaps she should.

So she should keep her toothbrush ready and make sure local and global media and the public keep a minute-by-minute watch on her whereabouts.