National explodes over an urgent billion dollar “time-bomb” funding requirement that wasn't disclosed before the election. “Ridiculous” says Labour. Who is right?

John Key is running the ACC’s billion dollar time-bomb story as hard as he can.

He accuses Labour of underfunding the Accident Compensation Corporation to the tune of “about a billion dollars” and has ordered a Ministerial inquiry to determine why the liability was not declared in the last Treasury pre-election economic and fiscal update.

“There are serious questions to be answered about this very large ticking time-bomb,” Key says. ”The previous government knew of the situation, but did not disclose this information prior to the election.”

“Ridiculous,” counters Labour’s new ACC spokesperson David Parker, claiming that his government simply acted on officials’ advice and in accordance with constitutional procedures in an election period.

Both Key and Parker point to a Department of Labour “aide memoire” to prove their points.

The first point to emerge from the official’s memo is that the Accident Compensation Corporation is going to need $297 million by March next year, and similar sums over the next three years – not a billion dollars upfront.

The extra funding is needed to cover unbudgeted costs in both the ACC’s Non-Earners’ account, which is funded from Government appropriations, and the Non-Earners’ portion of the Treatment Injury Account (TIA), which meets the cost of entitlements for personal injury caused by treatment from a registered health professional.

The need for extra funding is driven by increases in medical treatment, social rehabilitation, and ambulance costs, and because the Non-Earners’ portion of the TIA had been – as the officials quaintly put it – “funded on an informal basis without a clear policy” prior to this year.

For this year’s Budget, officials were directed to develop a clear policy. They decided that provisioning for Non-Earners’ claims on the TIA should be aligned with the ACC’s general policy and that post-2001 Non-Earners’ claims should be fully-funded on a three year basis.

Result: the TIA is now under-funded by $204 million, and $75 million is needed to bridge that part of the gap in the current year.

In short, the Labour-led Cabinet knew in December last year that there was a problem with the funding of Non-Earners’ claims.

At the end of June, a valuation of the ACC’s outstanding claims liability indicated that more Government funding was needed. Officials at The Treasury were informed of the situation, according to the Department of Labour.

Under normal circumstances, the Labour-led Cabinet would have had a paper on the issue when they considered a Budget Update in October – but the Budget Update deadline was brought forward this year, because Treasury needed time to produce that precious pre-election economic and fiscal update [PREFU].

This meant ACC actuaries did not have time to calculate the appropriations required to cover the Non-Earners’ funding shortfall to meet the Cabinet’s early deadline. What to do?

The Department of Labour’s aide memoire gets a bit vague at this point.

First, it says: “The former Minister [ Maryan Street ] agreed that the Cabinet paper instead be aligned with the [ACC] levies paper in December 2008”. It also states that “formal advice was provided in the form of a letter from the Minister for ACC to the Minister of Finance on 22 October 2008.”

Then it says: “Because the issue is of significant consequence, the Department subsequently advised the former Minister to wait until after the General Election to present the proposed increase in appropriations to Cabinet.”

The Department of Labour suggests that the delay was in line with advice provided in a Cabinet Office Circular on Constitutional Procedures in the election period.

The Department also suggests that the requirement for an extra $297 million this year was not included in The Treasury PREFU “because The Treasury forecasts do not include allowances for Cabinet decisions which have not yet been made.”

That explanation does not square with The Treasury’s explanation of the way it deals with fiscal risks in the PREFU. Its criteria for disclosing specific fiscal risks are “reasonable certainty”, “materiality”, and “active consideration”.

“Materiality” is established when risks have an impact on the fiscal forecasts of $10 million or more in any one forecast year.

“Active consideration” is established when risks are being actively considered by the Minister of Finance and responsible Ministers [eg. are the subject of written reports] or are decisions that have been deferred until a later date.

True, the Minister of Finance was not given formal advice until 22 October and The Treasury PREFU text was finalized on 26 September. However, if The Treasury was kept as well informed as the Department of Labour suggests, it would have known as early as June that a significant additional appropriation of funds would be needed by the ACC.

There should have been some reference to the ACC’s requirement for additional funding in The Treasury PREFU and there are no constitutional reasons for keeping it quiet.

Key is right to demand explanations about the absence of any disclosure in the PREFU.

Parker is wrong when he says Nationals’ claims that Labour “covered up ACC cost increases are ridiculous”.

Key has yet to call it a cover up. Perhaps he will – once he learns precisely when and how much ACC Minister Street and Finance Minister Cullen had been told about the ACC’s funding requirements before The Treasury PREFU was finalized at the end of last September.