Public Accounts Committee Report on

REPORT

The Public Accounts Committee

The primary function of the Public Accounts Committee is defined in Standing Orders as the review of reports by the Comptroller and Auditor General regarding –

· The audit of the Annual Accounts of the States of Jersey and to report to the States upon any significant issues arising from those reports;

· Investigations into the economy, efficiency and effectiveness achieved in the use of resources by the States, States funded bodies, independently audited States bodies (apart from those that are companies owned and controlled by the States), and States aided independent bodies;

· The adequacy of corporate governance arrangements within the States, States funded bodies, independently audited States bodies, and States aided independent bodies,

and to assess whether public funds have been applied for the purpose intended and whether extravagance and waste are being eradicated and sound financial practices applied throughout the administration of the States.

The Public Accounts Committee may also examine issues, other than those arising from the reports of the Comptroller and Auditor General, from time to time.

The Public Accounts Committee represents a specialised area of scrutiny. Scrutiny examines policy whereas the Public Accounts Committee examines the use of States’ resources in the furtherance of those policies. Consequently, initial enquiries are made of Chief Officers rather than Ministers. This is not to say that enquiries may not be made of Ministers should the reports and recommendations of the Public Accounts Committee be ignored.

The work of the Public Accounts Committee is ongoing rather than on a one-off basis and the Committee will return to topics previously examined in order to evaluate whether recommendations have been followed or procedures improved. If such a follow-up is unsatisfactory then the Committee may decide to hold further public hearings in order to identify the reasons for the lack of progress.

The current membership of the Public Accounts Committee consists of –

States Members	Independent Members
Deputy Sarah Ferguson of St. Brelade (Chairman)
Deputy James Reed of St. Ouen (Vice-Chairman)	Mr. Tony Grimes
Senator James Perchard	Advocate Alex Ohlsson
Connétable Tom du Feu of St. Peter	Mr. Chris Evans
Connétable Dan Murphy of Grouville	Mr. Roger Bignell
Deputy Alan Breckon of St. Saviour	Mr. Martin Magee

Introduction

1. This paper sets out the Public Accounts Committee’s comments on the proposals made by the Treasury and Resources Department (‘the Treasury’) for changes to the Public Finances (Jersey) Law 2005 (‘the 2005 Law’). By a Ministerial Decision dated 14th May 2007 (MD-TR-2007-0057) the Minister for Treasury and Resources approved the proposed amendments and agreed that the Law Draftsman should be requested to make the necessary amendments. A copy of the Decision and of the Treasury’s report supporting that decision are set out in Appendix 1.

Summary of the Committee’s comments

2. In summary, the Committee believes that –

(1) there is insufficient experience of the operation of the 2005 law for a thorough review to be possible;

(2) the proposals approved by the Minister will lead to a significant dilution in the States’ control of government expenditure; and

(3) would permit the States to avoid applying accounting principles that have long been regarded as essential by the private sector.

3. The Committee hopes that these proposals are not evidence that the Minister and the Council of Ministers wish to resile from a commitment to effective control of expenditure and absolute transparency in reporting to the public of the States’ financial affairs.

The Deputy Treasurer’s comments

4. In making these comments, account has been taken of observations made by the Treasury and Resources Department on a draft of this report. A copy of the Department’s comments is reproduced in Appendix 2. In a subsequent e-mail exchange, reproduced in Appendix 3, the Department clarified its comments.

5. In the Committee’s view, the Department’s comments do nothing to assuage the Committee’s concern. The Department has served only to add a further concern. One part of the Department’s response is that, in contravention of the rules on ministerial decisions, the Ministerial Decision as set out on the Department’s website is not a complete or accurate record of the Minister’s decision.

6. For the system of recording ministerial decisions to be worthwhile, the public should be able to rely on the records of decisions being complete and accurate. Ministers and Departments should be obliged to explain subsequently that the decision actually made was either different or subject to conditions that were not disclosed.

Timing of the review

7. The background to the Review is described in the Treasury’s Report as follows –

"The Public Finances (Jersey) Law 2005 (the Law) and subsidiary Regulations came into force in mid December, 2005. Financial directions have also been issued which provide greater detail on certain areas within the Law and on other financial matters where it was deemed necessary. As with any new Law the real test comes when the Law has been in operation for a short while and there are now a number of issues which need to be reconsidered. The purpose of this report is to highlight these issues and to gain approval to take the changes forward with the Law Draftsman and for the amended Law to be submitted to the States at the appropriate time . . .

The fact that the Law has now been in operation for a full financial year with the States having had the opportunity to operate within its structure and to work their way through the Annual Business Plan and Budget under the new procedures has highlighted areas where amendments are required”.^[1]

8. Whilst the Committee believes that a thorough-going review of the operation of the 2005 Law will in due course be justified, in the Committee’s view, a review at this stage is premature. The 2005 Law sets out a cycle for States expenditure of planning, States’ approval, spending and then reporting to the States.

9. It is still the case that this cycle has not been followed in its entirety for any single year. 2007 will be the first year to which the cycle has applied.

10. In the Committee’s view, a thoroughgoing review will not be possible until a least one full cycle has been completed and the current exercise is therefore premature.

11. The Committee intends that it will undertake such a review in the autumn of 2008 once the 2007 accounts have been published.

12. Against this background, the Committee has considered the amendments approved by the Minister and makes the following observations.

Definitions

13. The Ministerial Decision approves the Treasury’s following proposal –

"An amendment is proposed which would enable the States (purely for the purposes for the Public Finances Law) to merge two or more of the non-ministerial States funded bodies to allow States’ funds to be allocated to the merged body. This may assist in budgetary control terms whilst at the same time still allowing departments to operate in separate bodies.”^[2]

14. The background to this proposal is that the 2005 Law provides that an Accounting Officer should be appointed for each department who shall have personal responsibility for complying with the 2005 Law and for ensuring that expenditure is incurred within and in accordance with both the decisions of the States and the requirements of the 2005 law. In nearly all cases, each department’s Chief Officer has been named as the Accounting Officer. The effect is that the person who has key management responsibility for a department also has personal responsibility for that department’s financial management.

15. In a number of cases, and, in particular, for non-ministerial departments, relatively small amounts of money are involved.

16. However, the proposed change to the 2005 Law would have the effect of sanctioning a division between management responsibility and personal responsibility for financial management. In the Committee’s view such a division would be unsatisfactory in principle and would undermine one of the principles on which the 2005 Law was based.

17. Personal responsibility for financial management should be an integral part of the responsibility accepted by a Chief Officer.

Investment of money of the States

18. The Ministerial Decision appears to approve the Treasury’s proposal that the Minister fior Treasury and Resources may set an investment strategy for the States by order (which therefore would not require the approval of the States) rather than as at present by regulation (which would require the approval of the States).^[3]

19. The report does not provide any justification for this dilution of the States’ oversight of these matters.

20. In the Committee’s view, such a change should not be taken forward until a properly reasoned justification has been provided.

Inability to overspend

21. The Ministerial Decision approves the Treasury’s proposal that –

"That the Law be amended to enable the departments to carry forward overspends from one financial year to the next. The amendment should also allow the States to overspend its overall expenditure approval. The ability to overspend being in line with such restrictions and conditions as specified in a financial direction issued by the Treasurer.”^[4]

22. It is a fundamental principle of the system of financial control introduced by the 2005 Law that Accounting Officers are personally accountable for ensuring that their departments do not exceed expenditure limits provided by the States. This proposal effectively removes that fundamental constraint on spending.

23. Although the text of the Treasury’s report suggests that “strict guidelines and limits” would be necessary, the proposal does not suggest what those strict guidelines and limits should be. In effect, a change to the Law on the basis proposed by the Minister would enable the Treasurer and the Minister together to vitiate the States’ current control of government spending through the issue of a Financial Direction.

24. The current intentions of the Minister and the Treasurer may be that the power should be used sparingly but if the proposed amendments were made, the law would not constrain them.

25. An example of the consequences of this approach is provided by the recent decision of the Council of Ministers that the dispute over pay increases for 2006 should be concluded by awarding increases in excess of those assumed in the budgets for 2006 and for 2007. The Council of Ministers decided that a higher than expected pay increase should be awarded but that departments’ budgets would not be increased proportionately. To the extent that the pay increase would lead to additional expenditure, the Council of Ministers decided that departments were to recover the over spend from within their existing budgets.

26. Notwithstanding that public announcement, approval of the proposed change to the 2005 Law would mean that departments could, in contravention of that decision, overspend their budgets and carry forward the overspend without any further approval from the States.

27. In the Committee’s view, this represents a serious dilution of the effectiveness of expenditure control by the States.

Annual financial statements

28. Under the terms of the 2005 law, the States of Jersey's Annual Accounts –

". . . must be prepared in accordance with:

(a) generally accepted accounting practice and;

(b) accounting standards prescribed by an Order made by the Minister.”^[5]

29. The Treasury’s report accompanying the Ministerial Decision observes –

“At the time that the Law was drafted advice from the Law Draftsman was clearly that the “and” between (a) and (b) could be interpreted as “or”. In order to prevent confusion it is recommended that the aforementioned “and” be changed to “or”. This should allow the Minister to detail the basis on which the Annual Accounts are prepared if GAAP is not followed.”^[6]

30. For any system of expenditure control to be effective, it is important not merely that budgets are approved by an appropriate authority but that spending departments are required to account for their expenditure on a proper and rigorous basis.

31. In the past, the States’ practice in this respect has been disappointing as has been made clear in a series of reports by Audit Committees, the Audit Commission, the Shadow Public Accounts Committee and the Public Accounts Committee.

32. The Committee therefore welcomed the requirement of the 2005 Law (quoted above) that the States of Jersey should follow generally accepted accounting practice and the plans made within the Treasury and Resources Department for this to be accomplished. The Committee also welcomed the inclusion of this proposed change in the Strategic Plan published by the Council of Ministers.

33. Latterly, the Committee has been concerned at the time being taken to implement this requirement and thus to achieve the application to the States’ affairs of accounting principles that have long been regarded as essential for the private sector.

34. The Minister’s approval of the amendment proposed by the Treasurer would have the effect of removing the statutory requirement that generally accepted accounting principles should be employed the States.

35. In the Committee’s view, this step would be deeply regrettable.

36. The Committee hopes that the fact that the Minister has approved this proposal is not evidence that he and the Council of Ministers wish to resile from their commitment to ensuring that reporting of the States’ financial affairs should be absolutely transparent.

APPENDIX 1

MINISTERIAL DECISION MD-TR-2007-0057

Decision(s):

The Minister approved the recommended amendments to the Public Finances (Jersey) Law 2005 as highlighted in the relevant sections of the Report and agreed that the Law Draftsman be requested to make the necessary Law amendments, and that these be brought back to the Minister for consideration and approval as appropriate.

Reason(s) for decision:

To enable amendments to be made to the Public Finances (Jersey) Law 2005.

Action required:

Corporate Finance officer to arrange for the proposed Law amendments be forwarded to the Law Draftsman to enable the necessary changes to the Public Finances (Jersey) Law, 2005 to be progressed.

Signature:

(Minister/ Assistant Minister)

Date of Decision:

14 May 2007

TREASURY’S REPORT SUPPORTING MINISTERIAL DECISION

MD-TR-2007-0057

Review of Public Finances (Jersey) Law 2005

1. Purpose of Report

1.1 The Public Finances (Jersey) Law 2005 (the Law) and subsidiary Regulations came into force in mid December, 2005. Financial directions have also been issued which provide greater detail on certain areas within the Law and on other financial matters where it was deemed necessary. As with any new Law the real test comes when the Law has been in operation for a short while and there are now a number of issues which need to be reconsidered. The purpose of this report is to highlight these issues and to gain approval to take the changes forward with the Law Draftsman and for the amended Law to be submitted to the States at the appropriate time.

2. Background

2.1 States finances were previously governed by the Public Finances (Administration) (Jersey) Law 1967 and although that Law had been updated on numerous occasions it needed a thorough review and overhaul to reflect modern financial processes and practices, further urgency was given to the matter when the States agreed to move to a Ministerial system of government. As a result of the review the Public Finances (Jersey) Law 2005 was drafted and implemented.

2.2 The fact that the Law has now been in operation for a full financial year with the States having had the opportunity to operate within its structure and to work their way through the Annual Business Plan and Budget under the new procedures has highlighted areas where amendments are required.

3. Comments

3.1 Detailed below are areas where changes to the Law are proposed. Further amendments will also need to be made to the Public Finances (Transitional Provisions) (Jersey) Regulations 2005 – these will follow in due course.

3.2 Discussions on the proposed amendments have been held with the Law Draftsman and the Greffier of the States and they have identified further amendments related to States procedures and in particular those related to the annual Budget debate.

3.3 Proposed Law changes

For ease the following comments and issues follow the current order of the Finance Law.

3.3.1 Paragraph 1 Interpretation (Definitions)

The Finance Law enables amendments to this Paragraph of the Law to be secured through a Regulation and therefore any amendments can be progressed separately from the Law changes.

(a) Definition of Income

This definition is to be extended to “exclude money received by special funds”.

(b) Definition of a Non-ministerial States funded body

An amendment is proposed which would enable the States (purely for the purposes of the Public Finances Law) to merge two or more of the non-Ministerial States funded bodies to allow States funds to be allocated to the merged body. This may assist in budgetary control terms whilst at the same time still allowing Departments to operate as separate bodies.

(c) Definition of a States funded body

(i) Article 1 – The Interpretation section of the Law provides a definition of a States funded body which includes the term “Ministry”.

This part of the definition is now superfluous as decisions made after the Law was agreed are such that a Minister heads a Department and not a “Ministry” and, therefore, in effect a Ministry does not exist. There are no further references to “Ministry” in the Law.

(ii) The definition of a States funded body includes a States trading operation. However, due to different procedural requirements for the States trading operations there are certain sub-paragraphs of the Law where the term “States funded body” should not include the States trading operations. A minor amendment to the definition of a “States funded body” is required to address this matter.

Action: The definitions highlighted above should be redefined as identified.

3.3.2 Investment of money of the States

(i) The Law Draftsman has expressed concern that the Finance Law does not explicitly empower the Minister to establish an investment strategy (the ability to do so is currently established in the Investment Regulations). The Law Draftsman has proposed a minor amendment to the Law to achieve this.

(ii) The Law Draftsman has also queried the need for the Minister’s investment powers to be governed through Regulations (Articles 6(2) and 6(3) detailed below refer) and has asked whether these could be downgraded to Order-making powers.

6 Investment of money of the States

(2) Except as provided by paragraph (5), money to which this Article applies may be invested to the extent and in the manner prescribed by Regulations made by the States on a proposition lodged by the Minister.

(3) The Regulations may, in particular, provide for –

(a) investment by the Minister or the Treasurer; and

(b) the appointment of investment managers and their investment powers.

The delegation to the Minister to determine and present an Investment Strategy to the States was a major departure from the contents of the 1967 Finance Law and further amendments may be considered a step too far.

Actions:

(i) The Law to be amended to explicitly direct the Minister to establish an Investment Strategy.

(ii) That the Minister consider whether it is desirable to downgrade the Regulation making powers in Articles 6(2) and 6(3) to Order making powers.