Call to accountants: Help root out the devil in the Budget's detail

Schedule 7/page 38 of the 2009/10 Financial Statements, shows all Notes taken up, the interest on that Note, amount borrowed, when borrowed, when due, interest rate, and annual interest cost.

See the table below — it is is adjusted for the $200m Loan facility paid off and the $500m Bond Issue taken up.

In February 2011, there is also a $17,245,000 overdraft in place, taking the real Cash Debt to $1,047,245,000 - Budget Statement - page 23. The O/D is not listed in the March 31, 2010 Financial Statements which lists all the other figures.)

Bermuda legislation and common sense dictates a Sinking Fund. The SF is there to accumulate funds in order to repay Cash Debt. The legislated rate of contribution to the SF is 2.5 per cent of the total amount of Cash Debt outstanding. Based on the Cash Debt outstanding, Bermuda’s SF has to receive $25,750,000 per year (as reported in Note 5/page 13 of the Financial Statements of the Consolidated Fund 2009/10.)

In the Financial Statements there are three non-cash Guarantees that The Government and the Auditor General have treated, and still do treat, as debt.  These Guarantees do not require either cash repayment or payment into a SF. These non-cash Guarantees are:

• BNTB — $200,000,000
• WEDCO — $10,000,000
• Education Loans — $542,367
• Total of all Guarantees  — $210,542,367 as of March 31, 2010.

Government reports that the (adjusted) SF is currently at $82,810,000 as at March 31, 2010.

All together, the combination is $1,240,542,367 of Cash Debt plus Guarantees. (Add the snuck in Overdraft and the correct amount is $1,257,787,367). Because of the SF, the NET Debt is $1,240,542,367 minus $82,810,000 = $1,157,732,316 (with Overdraft acknowledged its $1,174,977,316 [*]). The annual Interest payment is $60,807,000 (but that’s without recognizing interest on the overdraft). The annual SF payment is currently $25,750,000.  The legislated Debt Ceiling is $1,250,000,000, so there is about $92m still available for additional borrowing (or $74m if we allow for the O/D).

That’s the start point, with all amounts as reported by Government. Now the accounting magic.

Step One: Write-off or otherwise remove the BNTB, WEDCO, and Education Guarantees. That instantly removes $210,542,367 from the overall Debt. This means that the new position — after this write-off — looks like this: $1,157,732,316 minus $210,542,367 = New Debt total of $947,189,949.

The new amount that can be borrowed while still staying under the $1,250,000,000 Legislative Limit is now $1,250m (Legislated Limit) minus $947m (New Debt) = $302m that can be borrowed without going over the $1,250m limit.

Step Two: Borrow $300m and report the new Debt Total to the people. The new Debt will look like this: $947,732,316 + $300,000,000 = $1,247,732,316 [**].  Still under the Legislative Limit.

Look further. $1,030,000,000 (Old Cash Debt) costing $60,807,000 a year in Interest.  Add the ‘new’ Cash Debt. $300,000,000 (New Cash Debt from the Two-Step move) costing (at six per cent) about $18,000,000 a year.

Bermuda’s new annual Interest cost will now look like this: $60,807,000 (for the old cash debt) + $18,000,000 (for the added cash debt) = $78,807,000 annual Interest cost.

Add the requirement to pay into the Sinking Fund. At 2.5 per cent of $300m that’s $7,500,000 a year. Annual SF payments will now have to be $25,750,000 (for old cash Debt) + $7,500,000 (additional for newly added cash Debt) = $33,250,000

Now put it all together. New annual Interest + New SF contribution: $78,807,000 + $33,250,000 = $112,057,000 total on new Debt Service Costs — every year. 

In one sentence, this is what will have happened. National Debt will only increase a nominal six per cent from today’s $1,175m[*] to $1,248m[**], but Debt Service costs will increase five times as much, 30 per cent, from $86m to $112m. This should command our close attention. This form of accounting is driven by a desire to avoid returning to Parliament for approval to raise the Debt Ceiling by another $500,000,000. The overall driver is the reality of seven years of past sins catching up.

Especially on this ‘financial centre’ island, no financial entity — big or small, public or private — should be using any kind of accounting that could result in reputational damage. This, surely, is the kind of thing that the BMA seeks to safeguard against.

Bermuda has hundreds of professionally certified Bermudian accountants.  Bermuda is a major accounting hub for KPMG, E&Y, Deloitte, and PwC.

At the least, all Bermudian accountants should be making their voices heard. So should the combined Big Four of accounting.