States of Jersey Financial Report and Accounts 2014.

FINANCIAL REPORT AND ACCOUNTS 2014

R.73/2015

FINANCIAL REPORT

AND ACCOUNTS

2014

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Contents

1  The Minister's Report  5

1.1  The Minister's Report. . . . . . . . . . . . . . . . . . . . . . 7

2  The Treasurer's Report  11

1. Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2. Summary of Performance . . . . . . . . . . . . . . . . . . . 13
3. General Revenue Income. . . . . . . . . . . . . . . . . . . .17
4. Ministerial and Non-Ministerial Departments'

Revenue Expenditure. . . . . . . . . . . . . . . . . . . . . .21

5. States Trading Operations – Net Revenue Expenditure . . . .26
6. Other Income and Expenditure and Accounting Adjustments27
7. Capital Expenditure. . . . . . . . . . . . . . . . . . . . . . .31
8. The States Balance Sheet. . . . . . . . . . . . . . . . . . . .37
9. Explanation of the Structure of the States of Jersey . . . . .50
10. Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . .52
11. Corporate Social Responsibility . . . . . . . . . . . . . . . .56
12. Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . .57

3  Statement of Responsibilities for the Financial

Report and Accounts  59 4  Remuneration Report  61

1. Remuneration Policy . . . . . . . . . . . . . . . . . . . . . .63
2. Council of Ministers . . . . . . . . . . . . . . . . . . . . . .63
3. Accounting Officers . . . . . . . . . . . . . . . . . . . . . .64
4. Segmental Analysis of Staff . . . . . . . . . . . . . . . . . .68
5. Median Remuneration . . . . . . . . . . . . . . . . . . . . .70

5  Governance Statement  71

1. Scope of Responsibility . . . . . . . . . . . . . . . . . . . .73
2. The Purpose of the Governance Framework. . . . . . . . . .73
3. Governance Framework and Structures . . . . . . . . . . . . 74
4. Review of Effectiveness . . . . . . . . . . . . . . . . . . . .90
5. Significant Governance issues . . . . . . . . . . . . . . . . .95
6. Closing Statement . . . . . . . . . . . . . . . . . . . . . . 101

6  Introduction to the Accounts  103

1. Changes in Accounting Standards . . . . . . . . . . . . . . 105
2. Explanation of the contents of the Accounts. . . . . . . . .106

7  Auditor's Report  109

1. Independent Auditors' Report to the Minister for Treasury and Resources of the States of Jersey. . . . . . . . . . . . 111
2. Report of the Comptroller and Auditor Generalto

the States Assembly . . . . . . . . . . . . . . . . . . . . . 112

8  Primary Statements  113

1. States of Jersey Consolidated Statement of Comprehensive Net Expenditure (Operating Cost Statement) for theyear ended 31 December 2014 . . . . . . . . . . . . . . . . . . 115
2. States of Jersey Consolidated Statement of Financial Position (Balance Sheet) as at 31 December 2014 . . . . . 116
3. States of Jersey Consolidated Statement of Changes in Taxpayers' Equity for the year ended 31 December 2014 . . . . . .117
4. States of Jersey Consolidated Statement of Cash Flows

for the year ended 31 December 2014 . . . . . . . . . . . . 118

9  Notes to the Accounts  119

1. Significant Accounting Policies . . . . . . . . . . . . . . . 121
2. Critical Accounting Judgements and key sourcesof estimation uncertainty . . . . . . . . . . . . . . . . . . . . 134
3. Changes to Accounting Standards. . . . . . . . . . . . . .136

9.3a  Restated consolidated Statement of Financial Position

as at 31 December 2013 . . . . . . . . . . . . . . . . . . . 137 9.3b  Restated consolidated Statement of Financial Position

as at 1 January 2013 . . . . . . . . . . . . . . . . . . . . . 138 9.3c  Restated Consolidated Statement of Comprehensive Net

Expenditure for the year ended 31 December 2013 . . . . . 139

4. Segmental Analysis. . . . . . . . . . . . . . . . . . . . . .140 9.4a  Segmental Analysis – Statement of ComprehensiveNetExpenditure for the year ended 31 December 2014 . . . . . 141 9.4b  Segmental Analysis – Statement of Financial Position

as at 31 December 2014 . . . . . . . . . . . . . . . . . . . 142 9.4c  Segmental Analysis – Statement of Comprehensive

Net Expenditure for the year ended 31 December 2013

(Restated). . . . . . . . . . . . . . . . . . . . . . . . . . .143 9.4d  Segmental Analysis – Statement of Financial Position

as at 31 December 2013 (Restated) . . . . . . . . . . . . . 144

5. Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . .145
6. Expenditure. . . . . . . . . . . . . . . . . . . . . . . . . .146
7. Non-Cash Items and other Significant Items included

in Net Revenue Expenditure . . . . . . . . . . . . . . . . . 147

8. Investment Income . . . . . . . . . . . . . . . . . . . . . . 148
9. Gains and Losses on Financial Assets . . . . . . . . . . . . 149
10. Social Benefit Payments . . . . . . . . . . . . . . . . . . . 150
11. Staff Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 151
12. Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . .155
13. Finance Costs. . . . . . . . . . . . . . . . . . . . . . . . .158
14. Property, Plant and Equipment. . . . . . . . . . . . . . . . 159
15. Intangible Assets . . . . . . . . . . . . . . . . . . . . . . .163
16. Non-Current Assets Held for Sale . . . . . . . . . . . . . . 164
17. Loans and Advances . . . . . . . . . . . . . . . . . . . . . 165
18. Available For Sale Financial Assets. . . . . . . . . . . . . .166
19. Infrastructure Investments. . . . . . . . . . . . . . . . . .169
20. Investments held at Fair Value through Profit or Loss. . . . 170
21. Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 171
22. Trade and Other Receivables. . . . . . . . . . . . . . . . . 172
23. Cash and Cash Equivalents. . . . . . . . . . . . . . . . . . 174
24. Trade and Other Payables . . . . . . . . . . . . . . . . . . 175
25. External Borrowings . . . . . . . . . . . . . . . . . . . . . 176
26. Currency in Circulation . . . . . . . . . . . . . . . . . . . . 177
27. Finance Lease Obligations . . . . . . . . . . . . . . . . . . 178
28. Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . 179
29. Derivative Financial Instruments. . . . . . . . . . . . . . .180
30. Past Service Liabilities . . . . . . . . . . . . . . . . . . . . 182
31. Defined Benefit Pension Schemes Recognisedon

the Statement of Financial Position . . . . . . . . . . . . . 184

32. Capital Commitments. . . . . . . . . . . . . . . . . . . . .186
33. Commitments under Operating Leases . . . . . . . . . . . 187
34. Risk Profile and Financial Instruments. . . . . . . . . . . .188
35. SOJ Common Investment Fund . . . . . . . . . . . . . . . 196
36. Contingent Assets and Liabilities . . . . . . . . . . . . . . 200
37. Losses and Special Payments . . . . . . . . . . . . . . . . 202
38. Gifts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .203
39. Related Party Transactions. . . . . . . . . . . . . . . . . .204
40. Third Party Assets . . . . . . . . . . . . . . . . . . . . . .209
41. Entities within the Group Boundary . . . . . . . . . . . . . 210
42. Social Security Funds Notes . . . . . . . . . . . . . . . . . 212
43. Events after the Reporting Date . . . . . . . . . . . . . . . 216
44. Publication and Distribution of the Financial

Report and Accounts . . . . . . . . . . . . . . . . . . . . . 217

10  Statement of Outturn Against Approvals  219

1. Statement of Outturn against Approvals. . . . . . . . . . .221
2. Accounting Policies. . . . . . . . . . . . . . . . . . . . . .223
3. Revenue Expenditure. . . . . . . . . . . . . . . . . . . . .225
4. Capital Expenditure. . . . . . . . . . . . . . . . . . . . . .229
5. Reconciliations . . . . . . . . . . . . . . . . . . . . . . . . 233

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1  The Minister's Report

The Minister's Report

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1.1  The Minister's Report

2014 has, without doubt, been a year of transition for the States of Jersey and this changing landscape is reflected in the financial report and accounts for the year.

In presenting the Financial Report and Accounts for 2014, I must first acknowledge the work done and significant contribution by my predecessor Senator Philip Ozouf , who presided over this Ministry for six years until November last year.

This report underlines the strength of Jersey's finances which makes us ideally placed to meet the challenges posed and opportunities offered by the ever-changing global financial situation and the trends of an aging population experienced across the world.

This document offers the public of Jersey the opportunity to scrutinise the way in which government departments fund their services and the context of position within which Jersey has managed its financial challenges during the year.

Despite the challenges, many of which are inherent in

a global economic downturn, and the aging population, Jersey remains strong and in an enviable position. The first signs of growth in the economy have started to emerge and provide for some optimism, not least as,

for first time since the recession started in 2008, it is predicted that 2014 will have delivered the first GVA growth in our economy of 1.6%.

Jersey's international reputation is also reflected in the awarding in 2014 of an excellent international credit rating from Standard and Poors. The rating of AA+ with stable outlook – which was maintained throughout the year

and into 2015 – reflects the view that Jersey has derived strength from its assets and support for growth.

Investments in strategic priorities, returning Islanders

to the workplace, house our community and reform our Health and Social Services, during the tenure of the previous Council of Ministers can be seen in outline in this Financial Report and Accounts.

During 2014 continued investment in Back to Work initiatives directly resulted in bringing down unemployment levels. By December 2014 the number of people registered as long term unemployed had dropped to its lowest level for three and a half years. It is a trend that our continued support for jobseekers and the increase in private sector jobs will help to sustain.

The year also saw the incorporation of the Housing Department into Andium Homes Limited, the successful issue of a public bond to fund new social and affordable housing and the introduction of Long Term Care benefits for Islanders. These changes and developments all have at their base, the determination of the previous and current Council of Ministers to balance a growing demand for services with the need to find innovative solutions within constrained resources to fund that demand in a fair and balanced way.

The issuance of a bond was a part of a significant and bold investment strategy in 2014 to use market and financial conditions to Jersey's advantage in order to fund much-needed improvements to Jersey's housing stock. The response from investors was overwhelmingly positive and the successful £250 million bond issuance was a reflection of the global perception of Jersey as a strong, well regulated jurisdiction. A number of Andium Homes projects are underway with an extensive plan of work scheduled for the coming years. Those due for completion in 2015 and 2016 include, refurbishment projects at Nicolle Close and Hampshire Gardens and new homes at Le Squez in St Clement and at Langtry Gardens, St Saviour.

The priority to reform Health and Social Services was announced in 2013 with plans, which continue, for the delivery of a new hospital. Reform in health and social care is needed to help Jersey face a substantial increase in both the number and proportion of older residents over the next 30 years.

While these large projects take shape, other initiatives have already been put in place to begin to address future care needs. Care costs are predicted to more than double by 2044 and the Long Term Care (LTC) scheme aims to ensure the community as a whole shares that cost. The scheme provides financial support to Jersey residents who are likely to need long-term care for the rest of their life, either in their own home or in a care home and is funded through contributions from the States – which began

in 2014 – and from local residents, through income tax payments, starting from the 2015 year of assessment.

As in previous years, the Treasury has taken on board recommendations from the Comptroller and Auditor General to develop the 2014 Report and Accounts to include a more in depth analysis of spend against the approvals made by the States Assembly. This analysis is presented in the form of the Statement of Outturn Against Approvals in Section 10.

The Minister's Report

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This is also the second year in which reporting from the Social Security Fund, Social Security (Reserve) Fund, Health Insurance Fund and Long Term Care Fund,

and Jersey Dental Scheme have been included in the financial report and accounts. The addition of these funds followed a recommendation by the C&AG to provide more comprehensive information, enabling readers to gain a full understanding of the financial performance of the States.

The inclusion of these funds provides a more complete picture as to the strength of our finances and, in particular, the reserves available to assist with the rising cost of an aging population, offering the opportunity for well thought through strategies rather than hasty decision making as costs inevitably rise.

Further recommendations by the C&AG will be reflected in the accounts in future years and will also be given full consideration in all areas as we continue to revise the way in which we allocate spending, reducing it in some areas of the public sector so that we can continue our work to transform the way we care for the increasing numbers of older people and invest in important capital projects.

Managing the Budget: States Income

The States of Jersey has continued to feel the effects of the challenging global economic climate in 2014 and this is reflected in the income performance for the year. This prolonged global downturn - with interest rates lower for much longer than ever imagined - has continued to impact our revenues. These are not challenges that are unique to Jersey but with a heavy reliance on our finance industry and, specifically the banking sector, increases in revenues have not occurred as strongly as previously forecast.

The most obvious indicator of this, and the most well- documented in recent months, is the actual drop of £15 million in income tax receipts from 2013 and the shortfall against the budget which was set when the consensus opinion both inside and outside of Jersey suggested that economic recovery would begin sooner than has been the case.

The shortfall in tax was offset to some extent during the year by increases in both GST and stamp duty – the latter being primarily driven by an increase in high value property transactions.

The total net revenue income for 2014 has also fallen compared to 2013 largely as a result of an increase in impairment expenses and the increase in pension liabilities. However, investment income within funds in

2014 has been robust and, once again, out-performed the market contributing to a surplus overall.

Revenues may have fallen short, however, overall, the States maintained a net income position and we will continue to look at ways to strengthen our forecasting. As Treasury Minister, I have established a new income forecasting group with new terms of reference and

a broader remit to help achieve this aim. However, forecasts will by their very nature vary and need regular updating as circumstances change. The key is to ensure that forecasts used for budgeting purposes are realistic and prudent.

Managing the Budget: Expenditure

Departments spent just under £674.2 million in 2014 on providing services. This was almost £28.3 million less than the amount available to them. Departments are carrying forward £15 million into 2015 to fund essential expenditure.

During 2014, we also saw a number of significant one-

off calls for funding which had an impact on revenue expenditure. Perhaps the most prominent of these were the £7 million on the Jersey Independent Care Inquiry and a £3.6 million grant to the National Trust for the purchase of Plémont. In addition, the public sector pay award, agreed in 2012, accounted for a total of £15.2 million from revenue, and was the largest single contributor to the year's increase in expenditure.

The more flexible system introduced by the Medium Term Financial Plan (MTFP) process was developed to encourage Departments to plan with more certainty over a longer period than had previously been the case and so reducing the desire to "use or lose" funding by the end of December each year. This allows the funding carried forward to be applied effectively to meet the service priorities set out in the Strategic Plan.

Jersey's first MTFP was a significant step forward in effective financial planning for States Departments and

is now in its final year. As we finalise the second, for the period 2016–2019, we are taking what we have learned so far to revise the process further and ensure that we have an even more robust and transparent but flexible system to make the best use of our resources across all sectors.

On top of the amounts carried forward in 2014, there was a balance of £22.1 million remaining in contingency and restructuring expenditure at the end of the year. £8 million of this has been carried forward into 2015 to manage known pressures.

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Capital expenditure is essential in order to maintain and improve our fixed asset base. It is also one of the key tools at our disposal to support and stimulate the economy

at this time. In 2014 Departments spent £51.7 million

on capital projects. Significant projects during the year included: A new Oncology ward allowing the hospital

to treat patients in one purpose built location where previously they were split across two sites, a new primary school in St Martin which is due to be completed in May 2015, work on the new Police Headquarters as well as work on the Island's infrastructure.

£3.4 million in the JTSF past service liability. These changes largely arose as a result of significant reductions in the gilt yield relative to inflation over the past year which is a key driver in the debt valuation. Increased repayments for the Pre-1987 Debt have continued in 2014 which

will reduce the long term costs of repaying this liability, albeit at a lower level than agreed in the MTFP following the measures to balance the consolidated fund in the 2015 Budget.

Conclusions

Managing the Balance Sheet

The continued focus during 2014 on managing the States' balance sheet means that despite the issuance of the £250 million bond for social housing, it has grown at a similar level to 2013. Active management of our assets and liabilities provides another means of safeguarding us against future economic shocks and providing sources of significant levels of funding.

The States balance sheet remains strong, with fixed assets now worth £3.3 billion. It is essential that we continue to seek ways to manage those assets in a way that works to the best advantage of the Island.

The value of the States' Strategic Investments increased by £3.9 million in 2014. The Treasury operates a policy

of active management of these investments, with regular meetings throughout the year. Included in this figure is over £8 million in dividends contributed to the States

in 2014 by the four utility companies. There remains a close working relationship with the Boards of the utilities to deliver the best returns possible to the States, while allowing them to retain sufficient working capital to be able to grow their businesses.

The total value of the Common Investment Fund

(CIF) increased from £2.4 billion at the end of 2013 to £2.8 billion at the end of 2014. This represents both investment returns but also the transfer into the CIF of additional funds previously invested outside. This increase in value is not income to the States in the same way as taxes or dividends: the increases in value remain within the relevant Funds to be used for specific purposes.

The Strategic Reserve stood at £786.5 million at the end of 2014, a net increase of £43.4 million from 2013 after the transfer of £10.2 million to fund the new hospital. Pension past service liabilities increased by £41.3 million in 2014. This was mostly due to an increase of £37.9 million in

the PECRS past service liability and an increase of

Like many other governments we are now under pressure and during the course of 2014 the picture of lower revenue expectations and growing demand on health and social services emerged clearly.

Despite those challenges we have remained in a strong position but we now need to make the changes necessary to the structure of the public sector and the way we manage our finances to make sure that this remains the case.

These accounts also outline the many positive steps that departments have taken during 2014, delivering against the Strategic Priorities set by the Council of Ministers and laying the groundwork for our economic recovery.

I would like to thank all the staff in the Treasury and Resources Department and across States departments, my Assistant Minister, Deputy Tracey Vallois and my predecessor, Senator Ozouf , for their hard work. I would also like to extend my thanks to the retiring Comptroller of Taxes, David Le Cuirot, for his commitment and dedication to outstanding public service over many years.

In presenting the Financial Report and Accounts for 2014, I also want to take the opportunity to look forward over the coming term of office as we maintain and build upon

a strong financial future for Jersey.

I am determined that we maintain strong public finances and balance the books as the economy recovers whilst planning prudently, to meet the funding challenges

we face rather than pass greater problems onto future generations. Fundamental to this objective is the need to restructure the public sector and change the way services are delivered.

Senator Alan Maclean Date: 28th May 2015

The Minister's Report

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2  The Treasurer's Report

The Treasurer's Report

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The Treasurer's Report 12

1. Highlights

Total Net Revenue  Total Net Revenue Income for the year was £6.4 million in 2014 compared to Income £278.5 million in 2013. Key movements between years were:

Including the results of all Social  •  Investment income was £131.0 million lower than 2013.

Security Funds and Andium

Homes Limited and after  •  An increase in the valuation in pension liabilities of £43.8 million. depreciation

Operating  There was an operating deficit in 2014, before depreciation, of £25.2 million. This (Surplus) / Deficit compares with an operating surplus of £0.5 million in 2013.

Strong Balance   The balance sheet has grown further in 2014 with an increase in the net asset balance Sheet of £73 million to £5.7 billion, largely as a result of investment returns.

Income Total Revenue Income remained strong at £1.158 billion. This was £125.1 million lower

than 2013 mainly as a result of exceptional investment returns achieved in 2013.

Included in the above, General Revenue Income was £12.3 million higher than 2013

largely as a result of the inclusion of the return from Andium Homes Limited. Expenditure Total Revenue Expenditure increased by £147.0 million compared to 2013 with the biggest

movements coming from pension liability movements and the impairment of assets.

Included in this, Net Revenue Expenditure of Departments increased by £38.0 million before depreciation. The biggest single contributor was the 4% pay award followed by the incorporation of Andium and some significant non-recurring expenditure such as for the Committee of Inquiry into Historical Abuse, Jersey Innovation Fund and the purchase of Plémont Headland.

Capital Expenditure Departments spent a total of £51.7 million on capital projects in 2014, with a further

£13.7 million spent by trading operations.

Investment Returns Investment Returns continued to perform well in 2014 with the Common Investment Fund

generating net returns of £207 million, a return net of fees in excess of 8%. £43.8 million of this is attributable to entities outside of the States of Jersey Accounts.

Reserves The balance in the Strategic Reserve increased by £43.4 million to £786.5 million in

2014. This is net of the £10.2 million draw down in 2014 for the Future Hospital project.

Social Security  The balances in each of the four Social Security Funds increased in 2014 to a total value Funds of over £1.4 billion.

Credit Rating Jersey was accredited with an excellent international credit rating of AA+ with a stable

outlook in 2014 from Standard and Poors and this has been maintained into 2015. Bond A £250 million public bond was successfully issued in 2014 to fund vital investment

in social and affordable housing largely through Andium Homes Limited which was incorporated during the year.

2. Summary of Performance

States Net General Revenue Income was £38.1 million less than budgeted, at £649.0 million

• Net Income Tax was £38.3 million less than budgeted due to a £39.8 million under-achievement in Personal Tax resulting from the continued impact of the wider economic environment, having a particularly detrimental

impact on employment income, and changes in the taxation of shareholder income. This was offset by a £0.5 million overachievement in Business tax and £1.0 million less bad debts than budgeted.

• Goods and Services Tax (GST) was £1.8 million less than budgeted due to actual performance not increasing in line with RPI as projected.

The Treasurer's Report

13 Highlights

• Stamp Duty was £1.4 million less than budgeted, due to a slower than expected economic recovery offset in part by increased activity in high value property transactions.

• Fines and Other Income were £4.3 million more than budgeted, mainly due to a higher level of returns from investments.

Departmental Near Cash Net Revenue Expenditure (the amount spent on day-to-day activities) was £12.2 million more than the Medium Term Financial Plan (MTFP), but £28.3 million less than the final approved amount after carry forwards and other allocations, at £674.2 million.

• Social Security expenditure was £8.0 million less than budgeted mainly due to an underspend in Income Support of £10.3 million as a result of lower levels of weekly benefit claimants and residential care costs than anticipated at the time of the budget being set and Employment Services of £1.6 million as a result of fewer employment grants than anticipated being issued. This was offset by an additional contribution to the Long Term Care Fund of £4.6 million as agreed by the States in P.140/2013.

• Education Sport and Culture spent £4.5 million less than budgeted, due to the approved arrangement to manage the differential between the academic and financial year in schools through carry forwards and lower than budgeted costs associated with Higher Education university grant payments.

• Health and Social Services spent £3.8 million less than budgeted mainly due to the timing of spend in respect of the transformation programme identified in P.82/2012 Health and Social Services: A New Way Forward'.

• Transport and Technical Services spent £2.0 million less than budgeted due to greater than expected tipping fee income from several large construction projects offsetting expenditure and the delay in a solution for the disposal of asbestos.

• Departments have requested to carry forward £15.0 million of these underspends of approved expenditure into 2015 for projects and other spending pressures.

In addition, £22.1 million of Central Contingency was not allocated in 2014. £14.1 million was returned to the Consolidated Fund, as planned in the Budget 2015, and the remainder will be carried forward into 2015.