0

$2bn pension liability ‘blows everything up’

Dr Duane Sands

Dr Duane Sands

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

An ex-Cabinet minister yesterday warned “we blow everything up” if an estimated $2bn in unfunded civil service pension liabilities is added to the national debt, adding: “We never thought judgment day would come.”

Dr Duane Sands, former minister of health, told Tribune Business that “we have to do a lot of things right” if The Bahamas is to extract itself from an economic and sovereign debt crisis that has been both accelerated and worsened by a combination of Hurricane Dorian and COVID-19.

Speaking after giving a sobering budget debate contribution in the House of Assembly, he argued that the government, all politicians and the Bahamian people must “call a spade a spade” and take ownership of the problems that threaten to engulf the country if not rapidly addressed.

Arguing that austerity measures will be less painful if The Bahamas “takes control of its own destiny” rather than letting them be managed by the likes of the International Monetary Fund (IMF), Dr Sands said this nation will now have to abandon the near-50 year practice of borrowing to cover government deficits that it has employed since independence.

The Elizabeth MP, acknowledging that many Bahamians were likely unaware of how their living standards, disposable incomes and quality of life stand to be affected by the measures the government will take to address its fiscal woes, also conceded that the country has effectively mortgaged its future for several generations to come as a result of the debt taken on both pre-COVID and during the pandemic.

Confirming that his budget debate contribution had delivered this message “in not so many words”, Dr Sands said The Bahamas cannot afford to ignore the fact that it is “in deep, deep trouble” due to the condition of both the economy and the public finances.

“It’s scary, but it’s real. It’s factual,” Dr Sands told this newspaper of the country’s economic and fiscal outlook. “The first thing is that we’ve got to claim it, and if we don’t claim it we will never start. We’ve got to call a spade a spade. We cannot pretend things aren’t what they are. We never thought judgment day would come. It’s going to be an awful lot of work. It’s going to be awkward, uncomfortable things politically to dig ourselves out of this mess.

“I don’t think we had much choice with this Budget. You have got to set the stage that the belt tightening comes, that we address these issues that we have kind of swept under the rug for so long. Hope is not a fiscal strategy. Something as simple as looking at the unfunded pension liabilities. We ain’t talking about that. If we put that on the books it blows everything up.”

The government’s finances, which project that the direct national debt will hit $10.386bn by end-June 2022, are calculated on a cash basis. They have yet to switch to accrual-based accounting, which measures future spending commitments that have yet to be incurred and, as a result, the true extent of The Bahamas’ liabilities is not measured or disclosed annually.

Among the items not covered by the national debt are the Government’s unfunded public sector pension liabilities, which are currently financed like a pay-as-you-go scheme via an annual Budget allocation. The amount provided for this in the 2021-2022 Budget is $116.1m, which is projected to increase by more than $119m in 2023-2024.

Previous research by the KPMG accounting firm projected that these unfunded liabilities will likely be around $2bn at this stage which, when added to the national debt, would take it well over $12bn by end-June 2022. Marlon Johnson, the Ministry of Finance’s acting financial secretary, said the Government was now collating information from various government departments and agencies to help create recommendations for addressing the issue.

But the International Monetary Fund (IMF), as recently as its 2018 Article IV report on The Bahamas, warned that the current system - where civil servants contribute nothing to funding their retirement - is “unsustainable”.

The Washington DC-based fund listed civil service pensions, together with the public sector’s wage bill and loss-making state-owned enterprises (SOEs), as three key reforms that the government must target if it is to reverse The Bahamas’ fiscal decline - and that was before both Hurricane Dorian and the COVID-19 pandemic.

“The civil servants’ pension system is unsustainable,” the IMF warned two years’ ago. “Government employees draw pensions at retirement without contributing to the system while employed. Staff analysis in the 2016 Article IV Staff report noted that accrued government pension liabilities totaled $1.5bn in 2012, and would rise to $3.7bn by 2030 as the population ages.”

The IMF called for reforms that involve “moving to a contributory regime in the near term, and to a defined-contribution scheme in the medium-term”. This would require civil servants to contribute a portion of their salary to funding their retirement, rather than having this financed 100 percent by the taxpayer through the budget - as is done currently.

And a presentation delivered by KPMG in 2013, the early years of the last Christie administration, estimated the unfunded, “pay-as-you-go”, civil service pension liabilities at around $1.5bn. These liabilities were set to increase to $2.5bn by 2022, and $4.1bn by 2032, unless reforms were enacted - and this is still yet to happen.

Dr Sands, meanwhile, backed the Government’s position that The Bahamas must focus on stronger economic growth as the primary solution for its present crisis since austerity measures - new and/or increased taxes, and spending cuts - would not be enough by themselves.

“We have to grow our economy, and the way we do that is making sure we take out a lot of the blockages to successful businesses or removing the things that cause businesses to fail prematurely,” he added. 

“The whole anti-Immigration issue. There’s a level of immigrant expertise, and I’m not talking about menial skills; I’m talking special, specialist skills. We in The Bahamas have a problem with that, and we have to move beyond that if we are going to thrive.

“I’m about 60 years-old, and I’ve watched this thing wax and wane. Sometimes we’re in deep trouble, and then things get better, but right now we’re in deep, deep trouble. You raise a very important question: Does the average Bahamian believe anything I said today? Probably not, because we have made it seem that all we need to do is pick the right guy and we’ll be OK,” Dr Sands continued.

“There are people who believe that if you don’t have it, borrow it. Not for much longer, that’s for sure.” With the Government set to pay more than $512m in debt servicing costs alone during the 2021-2022 fiscal year, and repay some $900m in principal to investors, Dr Sands suggested that these two obligations alone amounted to 50 percent of the Budget when combined.

“We cannot pay it back without substantial growth,” he added, “and that means we have to do a lot of things right. We have got to be innovative, we have got to be creative and whatever product we have has to be world class.

“If we’re going to stick with tourism it has to be world class; not so-so, not middle of the road. World class. In some instances our tourism product has dropped. We have got to do it right all the time, every time.”

Comments

hrysippus 3 years, 6 months ago

At long last an elected official has noticed the enormous green elephant standing in the corner of the room, not only has he noticed but he has seen fit to mention it's existence to the plebiscite. What a refreshing change from Bread and circuses, or should that be Grits and Junkanoo Carnival.

tribanon 3 years, 6 months ago

Sands is just telling the entire civil workforce and all employees at government controlled enterprises what they should have been told a decade or so ago, i.e. the pension benefits they thought they would one day be getting do not exist anymore.

themessenger 3 years, 6 months ago

Sands is the first politician to acknowledge the fiscal mismanagement that began during the Pindling era. Fifty years of non contributory pensions for civil service and the likes of BEC (BPL) free lunch still in the forefront of most Bahamians minds, conditioned for decades that the world owes them a living. From an older Bahamians perspective, the UBP might have been racist and somewhat oppressive but they knew how to make and handle money. Since we got rid of them we have sown the storm and are now reaping the whirlwind.

Godson 3 years, 6 months ago

My contemporaries may recall that I predicted this back in 2016: "Previous research by the KPMG accounting firm projected that these unfunded liabilities will likely be around $2bn at this stage which, when added to the national debt, would take it well over $12bn by end-June 2022.".

C2B 3 years, 6 months ago

The last paragraph is interesting as i see many commenters here support Bahamian owned, under funded enterprises, run by unproven people, over well financed foreign companies run by experts with deep experience. The PI lighthouse project is a classic. A paltry $2MM investment that everyone knows will not be sufficient to do anything, is being put forward by an unproven businessman and supported by nationalistic zealots. But alas, the great myth that there is a Bahamian that can do everything, persists. Talk about kidding yourselves.

tribanon 3 years, 6 months ago

Did you just say most of us Bahamians are too damn dumb and stupid to own and successfully manage and operate any kind of business enterprise in our country?

stislez 3 years, 6 months ago

You know some slaves loved the slave master, Ya boi is one of dem i C2B, pun intended.

sheeprunner12 3 years, 6 months ago

Did Duane Sands say this while he was sitting around the Cabinet table?? ........ Or in public forums while he sat around the Cabinet table??? ............. If not, he is being disingenuous now (nothing new for the rejected ones)

The FOUR PMs and/or their Ministers of Finance all knew that this money pot was boiling since 1967 ......... but they chose to kick the money can down the road until we have come to the bank of the river (or edge of the cliff)

Threee issues:

  1. Majority Rule style development (for the masses) ..... with no real commitment to a long term National Development Plan.

  2. Dependency on low skills-based tourism or enclave banking/FDI (Stafford Sands model) ...... with no real HR development strategy using education reform, skills training & RnD.

  3. Taking care of the "friends/families/lovers" ............ with no real changes to the old regressive tax structure to create more wealth (SWF)

Sign in to comment