Ratings group Standard & Poor’s has again maintained Australia’s AAA rating. But what are the odds of the group doing the same for NSW?

If you were a punter of modest means, a small amount on NSW losing its AAA rating in the next six months might be a worthwhile flutter after a couple of recent events.

S&P maintained Australia’s rating, despite some fears about debt, the banks and housing supply (continuing the great tradition of offshore agencies not understanding the Australian housing market). But for NSW, S&P has had the state rating on a AAA-negative footing since last October, meaning there is a one in three chance of a cut to that rating in the next three years.

NSW Treasurer Mike Baird waxed lyrical in an update this week about the state’s improving economic outlook: he was reported in Fairfax to have been” encouraged by his meetings with investors and representatives from major financial institutions” in New York, though he admitted “the state’s finances were still under pressure”. But he didn’t mention the Standard & Poor’s elephant in the room. Seeing he’d has just returned from visiting New York where Moody’s, Fitch and Standard & Poor’s are located, you would have thought he would have been quick to reassure that the rating was safe. But not a word in his statement.

In its statement in October, S&P said NSW’s budgetary performance had been ”moderate” and that increasing pressure to invest in infrastructure means the state’s ”budgetary flexibility may become increasingly challenged”. It said NSW could regain its stable credit outlook by boosting revenue — through higher taxation, or by asset sales.

Baird’s comments make you wonder if the voters of NSW are being readied for a loss of the AAA rating. Not a good look for the federal Liberals in an election year.

And that was all before the NSW Auditor-General Peter Achterstraat delivered a one-two punch to the government’s reputation for good financial housekeeping this week. He pointed out the many failings of NSW departments under previous government. But from what the Auditor General says, it seems the standard of accounting and financial management in the government has actually worsened since the O’Farrell government came to power in March 2011.

We already know that Baird and Premier Barry O’Farrell tried to con the voters and media when, after winning the 2011 election, they looked at the state’s finances and declared there was a hole that was black, or very deep, depending who you spoke to. That of course involved fudging the figures and the reality was that the last ALP government, for all its appalling features, left the state’s finances in a reasonable state.

In 2012, the Auditor-General revealed that Baird and the public servants of Treasury and other departments couldn’t add up and instead of a nasty deficit for 2011-12, the reality was a surplus of around $690 million because revenue and spending had been wrongly classified and accounted for (Baird reckoned this was still a deficit, regardless of what the actual numbers and plus signs in front of them said).

So no wonder the ratings groups (rickety as they are in their judgements) were already wondering WTF about NSW’s finances.

This week the Auditor-General followed up with another report looking at errors, fix-ups and accounting in the public service and government departments. It wasn’t pretty. The report was critical of the performance of the state’s public service in reporting accurately and doing the basic accounts properly, plus making sure all spending has been signed, sealed and delivered in the best possible way.

The net result was errors worth more than $3 billion in the 2011-12 budget, far larger than the $200 million recorded in 2010-11. The net value of state assets was wrongly estimated by $1.28 billion while net income was out by $2 billion. Archerstraat noted “the timeliness of NSW government agencies financial reporting improved significantly in 2012. However, the quality of financial reporting needs to improve to be more useful to Parliament, Government decision making and enhanced public sector accountability.” The main offenders were an incorrect valuation applied to the state’s investment in Snowy Hydro Limited and infrastructure assets related to earthworks within Roads and Maritime Services departments.

The Auditor-General also warned NSW taxpayers were being exposed to unnecessary financial risks:

“… with some key decisions and projects proceeding without proper governance and project management. Projects sometimes proceed with no business case and with poor risk management. Some service providers are being engaged with no service level agreements. Governance and project management need more focus. There was a significant increase in the number of recommendations I made in this area in 2012. Effective project governance is critical to ensuring project success and prudent use of taxpayer money.”

Now, as any public servants will tell you, rare is the Auditor-General’s report that doesn’t warn of some problem in public administration. Government auditors are the people paid to chip you if you fail to paginate a file properly (and no, that is not an exaggeration). The NSW budget is more than $60 billion a year, so $3 billion is just 5% of that. But much of the $3 billion is in asset values, which total considerably more. If a government and its public service can’t nail billions in assets and income down, what hope has the state of keeping its AAA rating?

O’Farrell revealed plans yesterday to “thin” the ranks of senior public servants to save tens of millions of dollars a year (at an unknown cost in retrenchments and payouts). O’Farrell says the savings will be spent in front-line services. If he wants to keep NSW’s triple AAA rating, he might direct some savings toward beefing up the internal audit sections of his big asset-owning departments.

Peter Fray

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