TREASURY AND RESOURCES MINISTER
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 (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.
6 (3) The Regulations may, in particular, provide for –
(a) investment by the Minister or the Treasurer;
(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.
3.3.3 Approval of annual business plan
(i) For very good reasons the Finance Law currently requires that the annual business plan is presented to the States by the Chief Minister (due to the fact that the plan may be an amalgam of issues - finance, manpower, law drafting etc.) However, it is expected that the debate on the financial elements of the plan will be led by the Minister for Treasury and Resources. The procedures defined in the States of Jersey Law and States standing orders actually prevent this from happening – however, the Bailiff allowed the Treasury and Resources Minister to lead the debate on financial matters in the 2007 Annual Business Plan debate.
(ii) There was some unease surrounding the debate on last year’s Annual Business Plan that the focus was on the approval of departmental objectives with little or no opportunity for States members to question the detailed financial budgets of departments. The views expressed by the Treasurer and the Treasury and Resources Minister at the time were that the debate on financial allocations was at the right level i.e. focused on the total allocated to a Ministerial Department and not on the detail which made up the total. The Minister is asked to reconfirm this view.
Actions:
(i) That the Minister agree that Law amendments be made to enable the Minister for Treasury and Resources to present to the States and lead the debate on the financial elements of the Annual Business Plan.
(ii) That the Minister confirms his view of the Annual Business Plan process.
3.3.4 Inability to overspend
Article 15 of the Law deals with variations to heads of expenditure and carry forwards.
Departments are currently able, subject to relevant approvals and within certain parameters set in a Treasury financial direction, to carry forward revenue under-spends from one financial year to the next.
However, the Law does not allow States funded bodies to exceed the annual expenditure approval or head of expenditure agreed by the States (“expenditure approval” being the total net amount that can be withdrawn by all States funded bodies from the consolidated fund in a financial year) and therefore it does not allow a States funded body to carry forward an overspend into the following financial year. An over-spend can arise both when a department incurs additional expenditure over and above that authorised, and also when it fails to recover its estimated income.
The Law allows funds to be transferred from one “Head of Expenditure” (being the total amount that a States department may withdraw from the consolidated fund for revenue / capital after taking into account any estimated income) to another with the relevant approvals. This effectively means that an overspend in one head of expenditure could be offset by a transfer of funds (either of a permanent or temporary nature) from an under-spend in another head of expenditure. However, this approach presents a heavy reliance on sufficient funds being available elsewhere to meet overspends.
With the move to longer-term planning and budgeting emphasis should be on controlling expenditure over a longer period which means that States departments may need to “overspend” in one financial year and make good in a subsequent period(s).
It is important from a financial control perspective that any Law amendment to allow “overspending” must be set within strict guidelines and limits.
The 1967 Finance Law (Article 19(6) referred) enabled departments (formerly Committees) to carry forward a surplus or deficit in its authorised net revenue expenditure (now head of expenditure) in accordance with such restrictions and conditions as are specified in the Code of Directions. It is recommended that a similar approach is taken to revisions to the current Law.
Action: That the Law be amended to enable 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.
3.3.5 Budget Procedures
Articles 17 to 19 of the Law cover procedural issues for the Budget debate including the presentation and approval of amendments to taxation. Due to the legal context of these Articles they were originally prepared and drafted in full consultation with the Law Draftsman.
Under current procedures any taxation drafts should be lodged as part of the Budget proposition – this is not practicable. The Law Draftsman has now had the opportunity to review the wording and procedures and has proposed amendments on the following matters:-
§ the need to split the budget proposition from the taxation draft (this being a draft Law);
§ the addition of procedures to be followed if the proposals included in a taxation draft are not supported by the States;
§ the introduction of minimum lodging periods for an amendment to an amendment on the Budget;
§ an amendment to Article 20(3) so that the Minister has the absolute right to move an amendment to a taxation draft where it is to give effect to an amendment to the Budget Statement which the States have adopted;
§ the fact that only the Minister can lodge a taxation draft – that is a draft Law – although any States member can bring forward an amendment to the budget proposition.
These amendments do not alter the intent of the original Law in this area they merely tidy up procedural matters.
Action: That the amendments highlighted above be incorporated into the Law.
3.3.6 Annual Financial Statement
When the Finance Law was drafted it was clearly the belief that the 2006 Accounts would be produced in line with UK Generally Accepted Accounting Practice (GAAP), however, this hasn’t happened and there is still much work required to reach this position. Article 32(2) of the Law states:
That the statement (being the annual financial statement) must be prepared in accordance with –
(a) generally accepted accounting practice; and
(b) accounting standards prescribed by an Order made by the Minister.
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.
Action: That the necessary amendment be incorporated into the revised Law.
3.3.7 GAAP Compliant accounts
It is well publicised that the States accounts do not comply with UK Generally Accepted Accounting Practice (GAAP) – the major area of non-compliance being in the accounting treatment of capital. A Business Case is being progressed which will identify the different stages and actions which are required to produce accounts which meet the relevant accounting standards whilst still reflecting the States of Jersey’s unique situation.
It is recommended that as part of the development and implementation of the Action Plan the implications of any accounting changes are fully considered alongside the current Finance Law so that any changes to the Law can be addressed and taken forward within the required timetable.
Action: That the Action Plan to achieve GAAP compliant accounts includes the consideration of implications on the PFL 2005.
3.4 The Law Draftsman has indicated that the changes proposed above should be achievable within current resources.
3.5 The Law changes will have to be progressed through the States then the UK Privy Council.
4. Recommendations
4.1 That the recommendations included under “Actions” in the Comments section above should be approved. That the necessary amendments be made to the Law and brought back to the Minister for consideration and approval as appropriate.
4.2 The amendments to the Law will need to be progressed through the States then on to the UK Privy Council for consideration and approval prior to any changes being brought into effect and it is therefore recommended that the Law be progressed.
5. Reason for Decision
5.1 To enable changes to be made to the Public Finances (Jersey) Law 2005.
States Treasury Corporate Finance
18 May, 2007 for Decision Meeting 14/05/2007
gov.je