Laying the foundations

Written By: Guest post - Date published: 4:33 pm, December 3rd, 2008 - 46 comments
Categories: ACC, national/act government, privatisation - Tags:

Let’s not fool ourselves that what we’ve seen from National over the last 24 hours on to the shortfall in the ACC non-earners account hasn’t been carefully managed in a way to lay the foundation for their arguments in favour of privatising the scheme.

I won’t go into a lot of detail around their motives, as this blog has covered it off already, including some very sensible comments from Economist Susan St John this morning in the linked podcast.

But there are two issues here worth exploring further. Firstly how this issue was handled by Labour in relation to the election, and secondly how National has handled it since.

On the first matter, Labour, by omitting to flag up prior to the election a cost pressure that they were aware of, may have scored a bit of an own-goal on their entirely sensible and defendable policy of retaining ACC as a government not-for-profit monopoly.

Yes there is convention not to commit a future government to new spending during an election campaign, and this convention is in place for good reasons. And it is entirely understandable, given the timeframes outlined in the Department of Labour’s report that Cabinet was not able to sign off on increasing the provisions in the non-earners account before the election.

But there was nothing stopping Labour adding their knowledge of the need for increased ACC provisions into the Pre Election Economic and Fiscal Update. There is a section of the PREFU specifically for things like this â€˜unquantified risks’, a section where government can outline risks that ‘would, if they eventuated, impact on the Government’s forecast new operating and/or capital spending amounts.’ (Indeed, s.26 (U) of the Public Finance Act would appear to suggest that adding the ACC shortfall to the PREFU wasn’t actually optional it was mandatory. The phrase ‘all other circumstances that may have a material effect on the fiscal and economic outlook’ is the key one here).

Now it’s not clear whether this was Labour’s omission or Treasury’s. It is of course Treasury’s responsibility to prepare the PREFU, and they should not have knowing left it out. But if it was Labour’s, it was a silly decision. If you try to fudge and hide things, you will always get found out.

But on the second point of National’s handling of the information.

Let’s not kid ourselves over this. This error on either Labour or Treasury’s part called for a response, but a proportional response from National is not what we saw.

John Key’s use of language at the press conference he called foreshadows a campaign they intend to run on creating public mistrust in what is in fact a world class accident compensation scheme.

There is no sense that ACC or the Department of Labour acted inappropriately. They followed protocols around giving advice to Ministers in regard to committing a future government during an election campaign. Further, based on comments John Key has made, it seems that when ACC knew of the future cost issue in May, they informed the ACC Minister that there would be an increase needed, although not the amount.

And on the case of the cost increases themselves, the four areas detailed in the paper John Key released seem straight forward. And as officials note in the paper, ACC’s consulting actuaries believe the movements between the current provision for the non-earners account, and the proposed provision, are reasonable.

Thus Nick Smith’s Ministerial Inquiry seems fairly pointless; the issues behind the need for the increase are already out in the public domain. As Linda Clark pointed out on Sunrise this morning, in some respects â€˜Ministerial Inquiry’ is a fancy, official-sounding way of sternly saying â€˜please explain’.

Based on their pre election comments over ACC, and John Key’s choice of words yesterday, in particular â€˜ticking time bomb’, it seems evident that there were other motives at play in yesterday’s press conference.

Disappointingly, although not surprisingly, the media have continued to uncritically use John Key’s spin. (How many times have you heard that phrase â€˜ticking time bomb’ over the last 24 hours )

And people should watch out for the Tory commentators who will join in, and start bagging ACC, using the current funding issue to call for privatisation.

Take Graeme Hunt for example: “Many people think ACC is paid for by general taxes while, of course, it’s largely paid for by employers and it’s long overdue for the system to be reformed.”

He is of course telling porkies: a quick look at page two of the 2008 ACC annual report reveals revenue from car drivers, workers and taxpayers (through the government) was $2,534 million over the last year, whereas revenue from employers and self employed was $1,118 million.

But that’s not the point. Tory commentators like Hunt, and John Key with his phrases like ticking time bomb, have a very precise purpose – to sully ACC’s reputation, and cast it as inefficient and in need of the disciplines of the private insurance industry. (A global industry, by the way, that includes companies like the recently bailed out US firm AIG. Hmm, the sort of people I want managing my accident cover )

They’ll ignore the PricewaterhouseCoopers report finding ACC to be a world leader.

And if we let them, they will proceed to privatise one of New Zealand greatest assets, which, as many people have noted, no one actually wants privatised but the insurance industry themselves.

Let’s not let them.
– From a Standard reader.

46 comments on “Laying the foundations ”

Comments are now closed

Strathen 1

3 December 2008 at 5:03 pm

I like this article, it seems to be the fairest and most well balanced I’ve read on here.

I do not agree with ‘Thus Nick Smith’s Ministerial Inquiry seems fairly pointless; the issues behind the need for the increase are already out in the public domain.’

I feel that this enquiry is needed so as to highlight the weak points in the procedures, systems, and accountability of this situation. My reasoning is that a near billion dollar blow out of a budget over 3 years needs to be acted upon with urgency when it is first discovered. To have it flagged in May and only revealed in December (allowing for the interruption of the election) is unacceptable to me and hopefully to NZ. An analysis of the systems and procedures should hopefully show the points that need refined and these can be changed. From this point, other departments will need to ensure they don’t have the same weaknesses.

I will not support it as a witch hunt, even though, I’ve been told there are plenty of witches in government. 😉

I mentioned accountability above and would like to clarify this. I do not mean accountability to be found so that the finger can be pointed at the previous Labour government. I would like to see that the appropriate level of accountability is set for the various people handling this and similar responsibilities. My gut feeling (yes, complete opinion on this point) is that it is too easy to pass the buck and to put this kind of issue off so as it doesn’t need a resolution. There needs to be a ‘buck stops here and you will be made redundant if you fail unreasonably’ type of accountability, particularly in these economic times.

I don’t agree with the comments regarding the phrases JK used, however I think the point of view has explained the basis of them and I understand the grounds the Author has made them.
ianmac 2

3 December 2008 at 5:09 pm

Surely the bottom line is that we have a first class ACC system. The bulk is a sort of user pays. The kids and elderly are paid for by General Funds. I have heard of no other country who have done it better. I guess that lawyers and Insurance companies would welcome change but not for my sake.
NX 3

3 December 2008 at 5:48 pm

The Nats went into the ’08 election with the policy to privatise ACC.

So given they now have the mandate, the privatisation of ACC was going to happen regardless.

The issue is the Nats are now forced to borrow an extra billion dollars. And John Key will now make changes to the public finance act so this doesn’t happen again. This is just like what happened when the Nats came to power in 1990 after the 4th Labour govt.

A disgrace really.
George Darroch 4

3 December 2008 at 6:38 pm

“The Nats went into the â€˜08 election with the policy to privatise ACC.

So given they now have the mandate…”

Excuse me, you’ll have to provide some evidence for that claim, because I don’t believe you.

They muttered quietly about opening the employer account to competition, which is partial privatisation in everything but name, but have no clear mandate to privatise ACC properly. Of course, a ‘death by a thousand cuts’ destruction of ACC would suit them fine.
Tim Ellis 5

3 December 2008 at 6:57 pm

This is one of the most even-handed posts I have seen at the Standard. Well done Standard reader, whoever you are.

My first reaction was that Labour’s decision was disgraceful and reminiscent of the Bank of New Zealand bailout. I further suggested it would remove the moral mandate Labour had on ACC reform. In retrospect, these are clearly two separate issues.

Let’s be clear about this. There is motive for spin on this issue from both sides.

National spin: This is a big deal. Labour should have declared this, and the fact they didn’t showed they can’t be trusted on ACC issues, or on economic issues generally. Labour is coming up with a smokescreen of a privatisation agenda to distract people from this major issue.

Labour spin:This is not a big deal. Labour didn’t need to declare this, and National is using it as a smokescreen for a privatisation agenda.

I think the truth is somewhere in between.

Let’s look at the issues.

1. Was this a big deal? National says yes, Labour says no. $900 million over three years is a major risk–about the equivalent cost of the student allowance scheme. Any way you put it, it’s a lot of money, which as this post points out, should have been disclosed. Probably in the PREFU, but at least publicly as a fiscal risk. Maryan Street has said she did not know about the “detail” of the risk until just before the election, but she certainly knew the general risk was looming for a long time. Labour committed the Government to the mortgage guarantee scheme, with a risk of $150 billion, at Labour’s campaign launch. It really does stretch to plain dishonesty that it wasn’t declared. The whole point of the FRA was for risks like this to be made public before the election.

2. National is using this as a smokescreen for its privatisation agenda. Well, possibly, except National made it clear before the election that it would consider opening up the earners’ account to competition. It doesn’t lead to a changed policy from National. Street claims National will use this issue to privatise multiple ACC accounts. That sounds like pretty desperate stuff. National’s stated policy only concerned the earners’ account. I don’t think they have the mandate to open any other account to competition. If they do, then fair enough, ping them then.

3. The need for a ministerial inquiry. Street says this isn’t necessary. National says it is. This is the first time, as far as I’m aware, that there has been an allegation of a major breach of the Fiscal Responsibility Act. Given the value of the FRA to open accounting by government, it seems to me that the allegation of such a breach really does need to be investigated. Did Treasury comply with the law? If not, then why? If they were instructed by ministers, then should they have followed ministerial direction? Should heads roll? If the FRA was complied with, should the FRA be changed to reflect its proper intent–to ensure that fiscal risks are included, whether cabinet decisions have been made or not?

Frankly the Labour Party do look very slippery over this. No doubt there are political motives behind National wanting to blame Labour for what has happened, but Labour opened themselves up to it.
Ari 6

3 December 2008 at 7:08 pm

So given they now have the mandate, the privatisation of ACC was going to happen regardless.

I don’t necessarily buy this. You don’t get a mandate for every single one of your policies just by winning an election, and this was anything but a landslide. John Key is very aware that he has to tread carefully on this one, and this hard sell of privatisation is a result of that.
mickysavage 7

3 December 2008 at 7:47 pm

I am interested in the use of the term “blowout” which normally means current expenditure being more than allowed for.

It appears that the fund was and is solvent but that it is likely with such things as income reduction because of the global credit crisis it will not be solvent in the future. It is implied that this is Labour’s fault whereas it is just one of those things that happens when you have large funds and rely on income generation.

Should Labour have highlighted it? It has to be remembered that for some time they have been saying that because of the credit crisis the whole of Government’s finances are under stress. Not only have they done this, they even campaigned on this basis. They stopped making promises that involved further expenditure because this was the irresponsible thing to do. And they kept saying that the books were only going to get worse.

Should they be blamed for this? Only if they are primarily responsible for the US of A’s sub prime mortgage disaster. To put it another way, no.

National are following the script established back in 1990 with the BNZ bailout. Criticism at that time was valid, although it did not justify the mother of all budgets. Criticism at this time really looks like a smokescreen for an attempt to privatise ACC.
Tim Ellis 8

3 December 2008 at 8:29 pm

mickysavage, the DoL report breaks down the blowout accordingly http://beehive.govt.nz/sites/all/files/ACC_Report.pdf. Attributing all of it to the global financial crisis just isn’t correct:

1. Increased cost of claims: $116 million
2. Shortfall in reserves: $91 million (only part of which is due to reduced investment returns)
3. Increased cost of Treatment Injuries: $75 million
4. Increased cost of pay-as-you-go claims: $14 million

That’s $297 million, each year, for the next three years, since ACC does its costings on a three year horizon. It just isn’t correct that the global financial crisis is responsible for this blowout. Government had no choice but to fund this expenditure, as with welfare expenditure, they are legislated entitlements. The Labour Government knew what the risk was, knew that unless ACC entitlements were drastically reduced Government would have to fund them, and did not include them in the PREFU.
mickysavage 9

3 December 2008 at 9:21 pm

Tim Ellis

I said “[i]t appears that the fund was and is solvent but that it is likely with such things as income reduction because of the global credit crisis it will not be solvent in the future.”

I did not say that income reduction was the only cause although I acknowledge that it was the only thing that I discussed. The report contains the sort of language that only Wellington bureaucrats could use and instead of reading and understanding you have to read, consult a dictionary, ponder and then understand.

My reading is that claims on the fund will increase because of the following:

1. Increased unemployment
2. Increased cost of treatment
3. Ageing population

Item 1 is a very likely result of Labour being unelected and item 3 has nothing to do with Labour.

Item 2 is related to the improved health infrastructure that now exists. Obviously Labour should not have trained and employed more doctors and nurses, without this the cost per case would have gone down.

When I read this, apart from the cost of treatment, Labour can be blamed for none of this. And the increased cost of treatment actually reflects a positive development.
Tim Ellis 10

3 December 2008 at 9:26 pm

Micky, I take your point, but the issue isn’t actually whether the increased costs are Labour’s fault or not, are they? I agree that unless ACC entitlements had changed (and National promised no change to entitlements), then the costs would have gone up whether National or Labour were in power. The issue is whether those costs should have been forecast (they were), whether those increased costs should have been advised in the PREFU (they weren’t), and whether the effect of those increased costs should have impacted spending priorities in other areas (they weren’t).

A billion dollars over three years needs to be budgeted for. Options are either to cut spending elsewhere, increase debt, or increase taxes. Labour didn’t do this. Even more cynically, Maryan Street was promising, before the election, to lower ACC levies. She made this promise, knowing that there was already a forecast blowout in costs that hadn’t been announced.
Daveski 11

3 December 2008 at 9:53 pm

Really impressed with this post. More please. The Standard at its absolute finest.
mickysavage 12

3 December 2008 at 10:04 pm

Tim

I agree that ideally the costs ought to have been forecast. My reading of the papers is that the firm numbers only appeared in October and that it was too late for cabinet to do anything about it then.

In an ideal world the figures perhaps should have appeared in the PREFU. The whole push of this issue however is that the increase is somehow Labour’s fault and I cannot see that it is.

Labour cannot be criticised for not saying very loudly that the next few years will be very difficult and that the finances will be very unstable. The theme of their campaign is that this will be the reality. They are being criticised now because for one particular fund they did not immediately state publicly that there would be an increased total claim. But in general terms they have been saying this for some time.

The extra figure of $300m in absolute terms is large. But my recollection is that the last total Government spend is in the vicinity of $57B. The increase is roughly 0.5% of total Government spend.

We do need to put things into perspective.
marco 13

3 December 2008 at 10:05 pm

I agree, very good post. I do read the Standard specifically for the opinion of the left knowing that its unashamidly bias, in the same way Kiwiblog has a right wing bias. More posts like this and I might start taking your opinions more seriously.
lprent 14

3 December 2008 at 10:06 pm

TE: You’re confusing earner and non-earner accounts again. Different parts of the ledger.

If a earner account is over-funded then the levies go down. If they are under funded, then the levies go up. Same for other levied areas things like cars etc.

It has no relationship to the largely tax funded non-earner accounts.

On your other points – crap.

After reading all of the stuff around the blogs and news, I haven’t seen a single cogent argument that says this stuff needed to be in the PREFU in a uncosted form apart from (possibly) a note saying that (like every year previously that I’m aware of) to fully fund the entitlements there needed to be an increase. Of course that has been the case for the last 9 years and is likely to continue.

Remember this area was originally not pre-funded under the Nats in 1999 and while the demand was probably there, it wasn’t worth the cost and effort of claiming. So the stats were low – if you looked back I suspect that there has been a trend of increased estimates in this area year on year.

Plus of course our population is rapidly aging (I think that the mean is closing on 45 at present), and older people have a lot more accidents which are more expensive to handle.

Our PM should know this – but of course he is a idiot newbie who hasn’t actually seen government or its processes. He also appears to only thinkj things through to the next headline. Face it – he is acting like a fool.

I’d be interested in the increasing costs of treatment. That looks like an interesting cost increase to look at.
the sprout 15

3 December 2008 at 10:24 pm

nice article.

this is definitely about National priming the electorate for changes to ACC that would, were their implications properly presented and understood (rather than carefully preceded by a lubricating trail of PR slime), be unpopular with voters.
Tim Ellis 16

3 December 2008 at 11:03 pm

LP wrote:

After reading all of the stuff around the blogs and news, I haven’t seen a single cogent argument that says this stuff needed to be in the PREFU in a uncosted form apart from (possibly) a note saying that (like every year previously that I’m aware of) to fully fund the entitlements there needed to be an increase.

I’m sorry, LP, but your understanding of the Public Finance Act is wrong.

Section 26U states:

26U Disclosure of policy decisions and other circumstances that may influence future fiscal situation

(1) An economic and fiscal update prepared under section 26O or section 26S or section 26T must incorporate, to the fullest extent possible that is consistent with section 26V, all Government decisions and all other circumstances that may have a material effect on the fiscal and economic outlook.

(2) If the fiscal implications of Government decisions and other circumstances referred to in subsection (1) can be quantified for particular years with reasonable certainty by the day on which the forecast financial statements are finalised, the quantified fiscal implications of those Government decisions and other circumstances must be included in the forecast financial statements.

(3) If the fiscal implications of Government decisions and other circumstances referred to in subsection (1) cannot be quantified for or assigned to particular years with reasonable certainty by the day on which the forecast financial statements are finalised, those Government decisions and other circumstances must be disclosed in the statement of specific fiscal risks of the Government required by section 26Q(3)(b).

That last paragraph would tend to undermine your argument LP. You’ve made a lot of wild claims about what National did or didn’t do in 1999, but there has never been an allegation that they breached the PFA. If the FRA had been around in 1990, Labour could easily have said re: the BNZ: Oh, but Cabinet hadn’t made a decision to bail out the bank, so we didn’t have to include that in the PREFU. Despite the fact that the FRA was written precisely to avoid the situation where incoming governments are loaded with these nasty surprises.

This is a nasty surprise. Labour knew about it and sat on it. There’s no other way of spinning it.

As for the claim that $300 million is not a large amount of money within a $57 billion budget, that is just nonsense. The 2008/09 budget has $800 million set aside for future policy initiatives in each of the out-years. That is in an environment where the budget itself was written without updates for the current world economic crisis. Take three hundred million a year out for the ACC blowout, and you have an outgoing Labour Government that followed a fiscal scorched earth policy.
lprent 17

3 December 2008 at 11:14 pm

So where was the policy decision in the last year or so?

What you have looks like an increasing number of claims from some causes, plus cost increases. That is a normal part of government business.

As you helpfully point out the requirements haven’t been met
1. there were no recent decisions or policies that caused this increase.
2. there was no reasonable certainty at the time that the PREFU was finalised.

At best they could have put in a statement saying that there were risks arising in the normal course of government. It wouldn’t surprise me if I saw it there, like the ones for health due to aging populations.

What there was, was that there was an expectation of increased costs due to non-policy decisions. That is something for budgeting and analysis.

Like Dimpost I also ask:- So why aren’t these idiots that we have as a government working on that rather than whinging. Isn’t it about time that they started to act like a government rather than an opposition, and take up the reins? Running a government is seriously hard work. To date in their short tenure, NACT haven’t shown any real ability. I hope for all of our sakes that they get some shortly.
Tim Ellis 18

3 December 2008 at 11:27 pm

LP, I don’t know what you mean by policy decision. The Government didn’t need to make a policy decision. It just required an appropriation. The legislation already defined what entitlements were set. The extra $300 million a year was just to fund existing entitlements.

I’m afraid your analysis is wrong again. The PREFU fiscal forecasts were finalised on 17 September. Maryan Street said today that she knew of the blow-out on August 14, with an ‘indicative outline’ that it was worth ‘approximately’ $300 million per year.

“all Government decisions and all other circumstances that may have a material effect on the fiscal and economic outlook” means that if your entitlement schedule means you will have to spend an extra $300 million a year, then that $300 million should be reported. It wasn’t.h
lprent 19

4 December 2008 at 1:22 am

So sections 1 & 2 don’t apply and 3 requires at best that there is a simple statement saying that there may be a risk of higher than expected expenditure (because the numbers weren’t solid). It is all about times and in particular about accounting cycles. I don’t think that anyone could have been sure there was a risk in September, because that would imply that they knew what the issue was. They couldn’t – insufficient data. Think like an accountant or a manager here.

If I understand this correctly, we’re talking about a financial period of June to June with a budget allocated in March. In the post-budget quarter (May) a concern was raised about expenditure in the next years allocation presumably based on a trend in that quarter. It obviously wasn’t too far out of whack or they would have run out of money in that year.

On the basis of the figures after the first quarter that would have been compiled in September, they were seeing a continued trend indicating a higher than expected expenditure. How much (in terms of the full-year or subsequent years) wasn’t known and more importantly why it was happening wasn’t known. Therefore it couldn’t be known if it was an ongoing increase or a blip (which happens all of the time). Risk is related to knowing why something is happening – in this case why the numbers were higher than expected. That risk was being analyzed (ie people were examining the numbers and the operations) in September. That risk assessment didn’t make the cut for the PREFU. In fact only preliminary estimates incorporating the risk were available in October after the PREFU was compiled.

Ok so now as of December good estimates of the risk are now available because now they have 2 quarters of data and a lot more analysis. It is the problem of the current government.

So here is my question – what exactly are the government going to do about it? When are they going to do something about it – like cover the liability? If they don’t, then that account at the ACC will run out of money in March. That would be irresponsible governance.

Or are we just going to see this pack of dickheads who are meant to be the government carry on in opposition mode? I’m paying for them, I expect them to do some damn work!
jbc 20

4 December 2008 at 4:51 am

Or are we just going to see this pack of dickheads who are meant to be the government carry on in opposition mode? I’m paying for them, I expect them to do some damn work!

C’mon Lynn. When the coffers are overflowing more than predicted each year it is bloody easy to sign away the extra money and sweep this sort of thing under the carpet. Some would probably praise that as sound economic management.

Any numpty can look like a fiscally competent manager in boom times – when revenue is growing at a faster rate than spending. That seems true based upon my own observations. A recession or downturn is what really puts management to the test – and it’s often a thankless job in those times.

Honestly, what do you think Cullen would be telling us if the roles were reversed? He’d be bleating about the previous govt with vigour – and the next day crowing about how he’s righting past wrongs by throwing an extra billion in the non-earners account. Unfortunately that’s not an option today like it has been in the past 9 years.

Perhaps he will offer some suggestions though the media?
lprent 21

4 December 2008 at 8:21 am

j: Not exactly. There was a *lot* of moaning in the left (especially in the alliance) about Cullen and Helen being so tight-fisted. Essentially they paid off the majority of the debt accumulated since the 70’s in the last 8 years and started saving towards future liabilitries. That was probably a harder task than simply running the economy when the needs for fiscal prudence are clear. There are few other countries worldwide who have managed to be fiscally prudent in good times – that is why their debts are so high.

Of course all of the whiners of the right kept looking at that as a ‘surplus’ through selective account reading and preferring to wanting to dissipate it in tax cuts.

Most of the room for programmes that Labour did launch came from the reduction in the amount of interest that the government was paying. At one stage in the 80’s/90’s that was more than a quarter of government revenue.

Anyway, that has left this government, in tighter times, a lot of room to maneuver compared to other countries. The question is are they competent to deal with it. There is the downside of increasing debt, a steadily diminishing amount of wiggle room.

Interesting listening to national radio this morning. Nick Smith is describing the shortfall as being largely due to increased medical costs and investment returns. He then went on to say that other accounts are likely to have the same pressures – will be looking at the other accounts and it is likely that they will require increased levies in those accounts.

That is a much better approach. It looks like there may be a few competent ministers. Pity John Key isn’t one of them. Looks like panic merchant.
vto 22

4 December 2008 at 8:23 am

Oh suk, i dont see anywhere in this thread to throw in a throwaway useless line..

[lprent: Isn’t that type of ablution usually done at kiwiblog?]
Tim Ellis 23

4 December 2008 at 8:36 am

If I understand this correctly, we?re talking about a financial period of June to June with a budget allocated in March.

No, LP. I don’t think you understand fiscal updates. They have to quantify fiscal risks over the following three years. The Minister was advised there was an unspecified risk in May by officials. On August 14 the figure of a $300 million blow-out was indicated. The cut-off date for numbers to be included in the PREFU is September 28.

I don’t understand the rest of your flailing attempt at debate on this, LP. Frankly, it’s just a load of rubbish and deflection. Come on, now, really. You’re saying it’s the National Government’s fault that $1 billion of extra expenditure, known to the last government before the election, wasn’t flagged as is required by the Public Finance Act?

As for what this current government will do about it, that’s quite obvious. An appropriation will need to be made. Government debt will push out to another billion, because National has said it will maintain existing entitlements. Options in other areas will be reduced, because the government doesn’t have the room to play with that Michael Cullen presented in the PREFU, because the PREFU didn’t inlcude fiscal risks that the government knew about. I suspect also that the Ministerial Inquiry will recommend much more severe penalties, and determine that heads should roll over this, and make any appropriate recommendations to ensure that issues such as these are covered off in future PREFUs.

I mean, really. If you think anybody believes the Minister when she says “we didn’t think a billion dollars was a lot of money, and we didn’t think it needed to be included”, then you really are struggling, LP. I know you’re fighting the good fight for Labour LP, but defending the indefensible doesn’t do you credit.
lprent 24

4 December 2008 at 8:47 am

TE: What I’m saying is that there was a trend for increasing costs and reduced revenues (the classic twin crunch of recession) that has been showing this year.

It was flagged as being a potential problem early in the year. Showed up again in the first quarter of this year and a closer examination made. The preliminary risk levels (and the numbers) weren’t available until October after PREFU. This last quarter has the numbers and risks refined enough to look at a 3 year projection.

Tell me – have you done any accounting? A lot of the time the numbers give you indications and you then have to poke around to find out what exactly is happening. NACT need to get on to running the government rather than acting as an opposition. So far the transition appears to be a bit hard for them.

BTW: You also sound like you haven’t moved from being an opposition supporter
Janet 25

4 December 2008 at 8:51 am

The ACC depends on huge investment funds that have built up over many years in order to have enough money to pay out when required. So it is inevitable that with the current dramatic global drop in returns that the value of the fund would drop alarmingly. So no surprise here. Just like the Cullen Fund, or Kiwisaver funds.

As well as the expense of rehab, and the long and extensive medical treatment, there is new clever and expensive technology now for people who are injured such as wheelchairs that can support people to stand, which are standard now for spinal cord injury, just $20,000 each.

So I favour the theory of a National beat up in order to present the public with the inevitability of privatisation. And now Nick Smith is talking about raising levies. I remember the huge anti-govt outcry last summer when the motor vehicle levy was put up a little.

Incidentally, yesterday was International Day of Disabled People and on an international disability blog an a Australian activist called for a universal, no fault compensation scheme for accident. We are so lucky to have ACC here in NZ.
Tim Ellis 26

4 December 2008 at 8:54 am

No again LP, you’re wrong. The recession only impacts the investment returns, which form part of the $91 million change in reserves. People do not start having more accidents, and medical treatment costs do not go up, simply because there is a recession. The recession does impact on the ability of people to move back into work, but this does not apply to the non-earners account, which covers people who are not in work.
XYZ 27

4 December 2008 at 9:01 am

As an ex ACC employee, I can say “hand on heart” that 1/2 of this problem is government/Treasury policy related and the other 1/2 is the cost and type of injuries being presented.

If the Govt was going to be impartial in the provision of ACC, then they would pay the levies that ACC requests. However, the govt and treasury decide what “levies” or contribution they will pay for the non-earners account. Now, if any other levy payer decided on what their levies would be, ACC would send it to a debt collector and then to court to have it paid in full. But somehow the govt and Treasury get to deicide there own input. Even if the costs are rising by 10% year on year, they are able by policy to only add a 2% increase.

Secondly, the cost of rehabilitation is increasing. The majority of the Rehabilitation contracts have price increase clauses in them which allow an annual review of the pricing, and some have certain indices attached which must increase each year. For example, if the PPI is 8% over the past 12 months, then the contract gets an 8% increase. So, this is contributing to the treatment costs increases.

On top of this, the type of injury is changing. Yes, we have an aging population, but we also are seeing in increase in more serious injuries in children. A child who is “dropped” or beaten by their parents and survives can cost upwards of $20 million for their lifetime. These types of injuries have increased a lot in recent years. With the funds having to be fully funded, the govt must pay enough “levies” in that year for the total cost of the injury. So that $20 million for 1 injury is not spread over 20-40 years, but must be collected in this financial year.

So, this issue, which is really minimal in the big scheme of things ($300M pa or 6% of ACC budget) is related to paying fair rates to providers, and an increase in the different types of injuries sustained by non-wage earners. These things will happen every year and the mix of injuries will always be changing as the population ages. But more importantly, the govt and Treasury need to stop underfunding the non-earners account. Whether it is legislation or policy, and whether is Treasury, Dept of Labour or the Govt’s decision, they are essentially a levy paper and should act as such by paying the increases required, then a “blow out” will not occur.

I am not blaming Labour for this “blow out” but historical precedent makes it difficult for ACC to manage all of its costs and clients when what is good for the majority is hampered by the Govt / Treasury’s lack of understanding and underfunding. It is impossible for ACC to pay one price on Rehabilitation contracts if the client is an earner vs. a non-earner. Not only is this unfair to the providers, the providers will eventually decide not to treat non-earners as the reimbursement for treatment will not cover the costs involved. This will create a second class in society when treating injuries, which is exactly the opposite of what ACC was established for.
Tim Ellis 28

4 December 2008 at 9:10 am

That’s an interesting perspective XYZ.

National’s problem doesn’t appear to be whether the blow-out was justified, or if true cost pressures exist, or whether ACC should pay those costs. National has guaranteed those existing entitlements.

The issue is, how predictable the cost increases were (which you’ve shown some light on), and when they were disclosed by officials and whether they should have been disclosed in reports (preliminary advice by officials in May, the PWC report noting $300 million likely per year in June, advice to the Minister on August 14, no inclusion in the PREFU on 6 October, no public statement on it before the election).
infused 29

4 December 2008 at 9:28 am

lprent is getting beat up over this. Quite good to watch imo.
XYZ 30

4 December 2008 at 9:43 am

Tim, I would say all these cost increase were unpredictable. Injury mix can only be base don historical injuries, so the change can not be predicted, but also they are related to the economic situation. The contracts use a mix of LCI, PPI and CPI, of which the PPI and CPI have been hugely affected by the global crisis, and are far higher than were predicted by banks and NZIER and used in the budgeting earlier this year. It will blow out all of the accounts, not just the non-earners, but the cost increase is more noticeable in the non-earners account as it is underfunded in the first place.
Yes I agree that it probably should have been noted, but in the scheme of things, this is small money. Should the Defense Force have noted in it’s briefing to the incoming Minister that it had 2 planes out of the country at the same time for maintenance and therefore couldn’t cope with an emergency? Probably, but they didn’t, cause it is operational. I am assuming the Minister didn’t flag this up as it is an operational funding issue, that occurs from time to time, as the levy payer for the non-earners account.
r0b 31

4 December 2008 at 9:45 am

I am busy and far away, so not following this topic, but it seems to me that Idiot/Savant has covered it with characteristic thoroughness (and links to official definitions) here.

Could it have been included in the PREFU, as National seems to be implying? No. The cutoff dates are here. The government’s fiscal forecasts and risks were finalised in mid-September, and the PREFU was released on October 6. Street didn’t write to Cullen until October 22…

I/S summarises:

In short, this is simply a beat-up by a government grumpy that its not going to be able to give away so much money to its rich mates. They should get over it. Labour followed the proper process and obeyed the normal disclosure rules, and I have no doubt that National would have done exactly the same. The lesson here is that problems don’t always crop up at convenient phases in the budget cycle, and National would be better learning that than throwing a childish temper tantrum whenever something goes wrong.
Tim Ellis 32

4 December 2008 at 10:02 am

XYZ wrote:

Yes I agree that it probably should have been noted, but in the scheme of things, this is small money. Should the Defense Force have noted in it’s briefing to the incoming Minister that it had 2 planes out of the country at the same time for maintenance and therefore couldn’t cope with an emergency?

I didn’t read the Defence Force’s briefing to the incoming minister, but that is not a requirement of the public finance act. The PFA does state that a government must specify its fiscal risks. $1 billion over three years is not “small money”. It is a major fiscal risk. The Government only has an $800 million provision for unallocated expenditure priorities. Take three hundred million out of that provision, by not specifying a $300 million risk in the non-earners’ account, and you have dramatically affected the government’s ability to introduce new spending initiatives.
Tim 33

4 December 2008 at 10:14 am

If Street didn’t ‘write to’ Cullen until 22nd October then I’m guessing the inquiry will show her in a poor light, given that she was aware of the problem at least in May, and had a reasonable idea of the amounts at least in August. It’s also not out of the realms of possibility that she discussed the issue with Cullen prior to writing to him and he had advised her not to ‘write to’ him until after the Prefu so he wouldn’t have to include it.
The beat up from the left is understandable, it’s a great opportunity to scream ‘Privatisation’. Privatising the non-earner’s account is just ridiculous, and that sums it up. Opening other parts of ACC to competition is a different matter, and not at all irrational.
r0b 34

4 December 2008 at 10:25 am

If Street didn’t â€˜write to’ Cullen until 22nd October then I’m guessing the inquiry will show her in a poor light, given that she was aware of the problem at least in May

Guess all you like Tim. But according to The Herald “officials had originally advised that it should not have been disclosed because they were not certain of the cost”. Hence it was an internal matter until Street brought it to Cullen’s attention on 22nd Oct, 16 days after PREFU was released. All Labour seem to be guilty of here is following official’s advice and not inventing a time machine.
Tim Ellis 35

4 December 2008 at 10:32 am

All Labour seem to be guilty of here is following official’s advice and not inventing a time machine.

Sounds like “All Taito was guilty of was being helpful to his constituents”.

The Ministerial Inquiry will show what Ministers knew, what officials advised them, when they advised them and when they knew, what advice should have been given, which interpretation was correct, and if all procedures were correctly followed, whether changes should be made in future to ensure that major items of expenditure like this are properly flagged before the election.

But nice of you to prejudge the outcome of the inquiry r0b.
toad 36

4 December 2008 at 10:39 am

Tim said: Opening other parts of ACC to competition is a different matter, and not at all irrational.

Guess whether it is rational depends on what outcome you want Tim.

If you want to see employer levies drop because people who are injured are wrongly denied cover by the insurer, receive no weekly compensation, end up on a sickness benefit, have to pay for their own rehabilitation, and have to engage legal representation to challenge the insurer’s decision, then it has to be the way to go I suppose.

That was my frequent experience working as an ACC claimant advocate in the 1999-2000 period when private insurers were involved in administering work accident insurance. [I have to say that I didn’t make a lot of money out of representing such claimants – I only charged what they could afford, which in many cases was nothing so I was working on a contingency no win – no fee basis]

The easiest way for private insurers to reduce levies to gain market share is to wrongly deny claims.

This occurred particularly with gradual process injuries such as occupational overuse injuries (OOS), where the legal tests are complex and put an onus on the claimant to show that the work environment or work tasks have a property or characteristic that causes or contributes to the cause of the personal injury; that property or characteristic is not found to any material extent in the non-employment activities or environment of the claimant; and that the personal injury is not related to non-physical stress.

The private inurers denied the claims in the knowledge that most claimants would not have sufficient understanding of the law to personally challenge them and could not afford the thousands of dollars that legal representation would cost them.

The difficulty is that (apart from the self-employed) the choice of insurer is the employer’s – the injured employee has no choice and gets whatever insurer the employer has chosen. Those who give the best deal to employers in terms of levies are likely to be those that give the worst deal to claimants in terms of entitlements.

In 1999-2000 the private insurers took all the low risk business while the ACC subsidiary @work insurance ended up lumbered with the high risk high levy industries.

And what happens if a private personal injury insurer goes belly-up?

I suppose we get an AIG-style taxpayer funded bailout. Or do all the claimants on their books just lose their entitlements?
tracey 37

4 December 2008 at 11:18 am

Diane Foreman must be getting so excited at the prospect of payback, finally.
Tim 38

4 December 2008 at 11:26 am

toad, your arguments are very good against opening ACC to competition and I agree with the dangers you point out. I don’t have the experience you have in this nor do I have compelling reasons to research it. Time will tell what the new government will do, and in respect of rationality I would certainly expect them to thoroughly research what the impacts would be of any changes they make.
I take back the statement I made, and if you’d be so kind I’d like to replace it with “consideration and investigation of opening other parts of ACC to competition is a different matter, and not at all irrational.”
I agree with the position that it would be bad for the government to open ACC to competition just to benefit private insurers, but if there were actual benefits to ACC consumers (which outweigh the risks) then let them be considered.
I know Standard readers and others on the left will be watching keenly to see what the government does in this area, and I’ll also be skeptical about what benefits there will be to competition. But in all fairness they haven’t done it yet and they did say before the election they would consider it, so it’s not like it’s a secret agenda. Let’s see what they come up with before condemning it.
lprent 39

4 December 2008 at 12:43 pm

infused: “lprent is getting beat up over this. Quite good to watch imo.”

Not really – in essence TE is trying to make a mountain out of a molehill. Unfortunately I don’t have much time during the day as TE.

The accounting timeline is the issue (very well covered in NRT), and TE simply doesn’t want to look at anything quite so prosaic.

Either that or doesn’t understand accounting, esp the interesting govt variants – as XYZ alluded to. I’ve only seen them personally once in the late 80’s while on a contract. But friends of mine have incredously cringed about them.
Tim Ellis 40

4 December 2008 at 2:13 pm

LP wrote:

Either that or doesn’t understand accounting, esp the interesting govt variants – as XYZ alluded to.

I was an audit partner in one of the Big 4 firms for eight years before moving to where I am presently running internal audit with a major retail bank. I do have some understanding of accounting. While I defer to your expertise in software development matters, LP, I think I know my way reasonably around the Public Finance Act.
r0b 41

4 December 2008 at 3:27 pm

Sounds like “All Taito was guilty of was being helpful to his constituents’.

Sounds like you are desperate to beat up a non issue. This would be consistent with your continual attacks on Labour (including at least one known irrational lie) over the last few months.

I know we all came to expect great things from the last Labour government, but even they were bound by the laws of physics. Michael Culllen couldn’t travel backwards in time. Oct 22nd comes after Oct 6th.
gomango 42

4 December 2008 at 4:32 pm

I’m always really surprised when ACC i debated and the world class comments get thrown around. I’ve talked about the following (and other ACC issues) several times on the Standard and what usally happens is the people stop commenting and move on to other things because its kind of a hard issue to accept. Lets make it really easy with two questions, two answers and a page reference:

a. What is the current Asset position of ACC as a whole?

b. What is the current liability position of ACC a a whole?

Answers:

a. $13.2 billion

b. $21.2 billion

Page 91, 2008 ACC Annual Report

The outstanding claims liability ($18 billion) is $5 billion bigger than assets. And investment returns to 2008 is not really the issue – I think ACC reported a loss of 0.8% or so which is really rather a very good performance in the wider context. The real issue is systemic underfunding, mispricing of risk and willy nilly extension of the originally intended WORKERS COMPENSATION scheme into social areas it was never intended to cover.

Solvent? World Class? Best of breed?
lprent 43

4 December 2008 at 6:40 pm

TE: I was wondering. Well as you know, the public finances systems are archaic. They remind me of pre-1986 business accounting in NZ with lousy reporting systems. Frankly I’m surprised that it has taken them this short a time to figure out exactly where they’re bleeding red ink.

BTW: the reason I did an MBA was because I couldn’t understand accountants (coming from an operations side). I learnt that side quite well (and seem to spend excessive amounts of time looking at other peoples accounts). The course gave me a chance to retrain. Since it was a bit boring I spent most of my time playing with PC’s and subsequently developed a career in it…. Kind of puts you off training when each time you do, you decide not to follow that career…
Tim 44

4 December 2008 at 7:15 pm

Well it seems there are further deficits found, this time in one of the earner’s accounts.
http://www.national.org.nz/Article.aspx?articleId=28995

My thoughts on it are 1) is ACC actually being well managed? and 2) were Labour actually trying to keep this quiet to stop themselves looking bad?
Tim Ellis 45

4 December 2008 at 10:34 pm

TE: I was wondering. Well as you know, the public finances systems are archaic. They remind me of pre-1986 business accounting in NZ with lousy reporting systems. Frankly I’m surprised that it has taken them this short a time to figure out exactly where they’re bleeding red ink.

Actually LP the PFA is considered to be world-leading. As of 1 January 2007, all New Zealand public entities have adopted the NZ-IFRS reporting standard, the same used by private sector organisations, making reporting standards in the public sector sector-neutral. There are a number of issues around applying the IFRS to the New Zealand public sector environment (and the Auditor-General has expressed significant concerns about the appropriateness of the IFRS in a New Zealand public sector environment, particularly with regard to the significantly increased costs to public entities and the need to get external audit advice), but the IFRS standards can hardly be viewed as “archaic” or backward.