Senior Irish public sector pay levels will define Irish competitiveness in 2012

The General Government Debt of Ireland has soared from €144.4 billion (93% of GDP) in 2010 to €166.1 billion by the end 2011 (107% of GDP).  General Government Debt measures the total debt of the State and is used as a comparative measure across the European Union.  But to judge top-level public sector pay in the country one could be forgiven for thinking that the Celtic Tiger is still jiving!

The main story in today’s edition of the Irish Independent (3 Jan 2012) reports a difference of opinion between Finance Minister, Michael Noonan and Public Expenditure Minister, Brendan Howlin about how much the next Secretary-General of the department of Finance is to be paid. Noonan wants to bust the Governments €200,000 per annum pay cap on civil servants because apparently several candidates are ‘put off by curbs on salary and perks’, according to the Independent. Some overseas applicants are skittish about no reimbursement to attend interviews and no relocation expenses. But times have changed in Ireland from the time that the chief executive of an internation charity that raises funds for worthy causes in Ireland could be paid a severance package close to €400,000 and remuneration of over €700,000 while State agencies paid close to €8,000 per table to host a party of ten guests at a charity’s fund-raising dinner.

Public sector employment implies service to the public and senior public sector employees across the world are typically paid less than their counterparts at an equivalent level in the private sector.

It is interesting to compare rates of top-level public service pay in Ireland with those in other jurisdictions. The ten highest paid public sector office holders in the United States are:

10. Hilary Clinton, Secretary of State €144,500

9. Timothy Geithner, Secretary of the Treasury, €147,700

8. Harry Reid, Senate Majority Leader, €149,300

7. Benjamin Bernanke, Chairman of the Federal Reserve, €154,170

6. John Roberts, Chief Justice of the Supreme Court, €167,900

5. Admiral Michael Mullen, Chairman of the Joint Chiefs of Staff, €170,400

4. John Boehner, Speaker of the House, €172,550

3. Joseph Biden, Vice President, €175,500

2. Patrick Donohue, Postmaster General, €189,140

1. Barrack Obama, President of the United States, €309,000

The Permanent Secretary of HM Treasury is paid within the range €209,000 - €215,000, a rate that takes into account that London is ranked 18th highest in terms of global cost of living.

The recently reported 15% pay cut in 2012 that will save the State €138,000 and the waiving of potentially hefty bonuses by the chief executives of National Treasury Management Agency (NTMA) and National Asset Management Agency (NAMA, Ireland’s bad bank) may seem like an extraordinarily benevolent personal gesture There are 14 executives of NTMA and NAMA in receipt of an annual salary of more than €250,000.

The salary of the chief executive of NTMA will apparently be reduced to €416,500 in 2012, compared to the reported €1 million paid to the post-holder in 2008.  This reduction occurs at a time when Ireland is not fit to be in the bond market, but this level of remuneration is still 215% higher than the combined salary and performance pay of the chief executive of the UK Debt Management Agency who oversees exchequer borrowing that is almost nine times greater than the current record-high General Government Debt of Ireland.  It is also noteworthy that 35% of the British national debt is owing to parties outside Britain compared to 85% in the case of Ireland before Troika package became available, a clear indication of the wealth creation capacity of both nations.

Is there not a case for reintegrating these agencies into the Department of Finance from which NTMA was spawned over twenty years ago and dispensing with remuneration policies and practices that bear absolutely no relationship to the cost burden on taxpayers for similar work in other jurisdictions, or the capacity of the State to pay? A strategic move of this nature would clearly signal the Government's unambiguous priority to make Ireland globally competitive and economically robust.

NTMA defy Public Accounts Committee

I have been observing the relationship between the National Treasury Management Agency and the National Assets Management Agency with the Public Accounts Committee with increasing concern.

NTMA and NAMA Remuneration

The activities of the NTMA and NAMA have been examined on several occasions by the Public Accounts Committee in 2010, most recently on 18 November when the Committee sought a breakdown of the remuneration paid to NAMA employees – all seconded to NAMA from NTMA. The Chief Executive of NAMA, Mr Brendan McDonagh in a letter to the PAC dated 7 December 2010 defied the Committee and advised:

That he discussed the Committee request with Mr John Corrigan, Chief Executive of NTMA – but not, curiously, with the Secretary General of the Department of Finance,  an ex officio member of the statutory  NTMA Advisory Committee and principal advisor to the Minister for Finance to whom both agencies are accountable.

• That the pay structures in NTMA are outside of public service pay structures (as authorised by the National Treasury Management Act 1990).
  
• That the NTMA recruit mid-career specialists in banking, property, corporate finance and law for NAMA on what he termed a ‘fixed purpose’ contracts.
  
• The contract and remuneration arrangements of each employee are unique  to a particular individual and are treated as confidential.
  
• The NTMA/NAMA staffing ‘operating model’ is shrouded in so much secrecy and opacity that colleagues do not know how much each other is paid and that NAMA would apparently be seriously compromised in the conduct of its mandate were it to be exposed – (presumably, to the rigours of public and media scrutiny and that of the marketplace  from which NAMA seeks to determine  ’ market competitive’ salaries). 
  
• ‘Operational freedom to negotiate’, authorised by legislation, in NTMA has apparently become seamlessly synonymous with clandestine secrecy by the Chief Executive of a State agency which does not have a conventional board of directors and where the same chief executive, rather than an independent chairman, corresponds with the Minister for Finance on the performance of the entity that he manages on a day-to-day basis.

McDonagh’s letter and Corrigan’s patrician perspective on the Committee’s request is such an appalling indictment of these State agencies that a citizen would wonder about its capacity to fulfil its core objectives in a culture clearly devoid candour, accountability and transparency.  NTMA and NAMA need to be advised in blunt and uncompromising terms  by the PAC  that the principles of transparency and accountability expected of the Irish public sector are not those of the nod, wink and handshake that prevail, for example,  in the dictatorships of North Korea and Burma. The standards espoused by NTMA also directly contravene the policy of the Department of Finance with respect to the governance of commercial State entities.

Furthermore, this is precisely the self-righteous, conniving, corporate attitude which champions generic, non-itemised accounting that prevailed in FÁS, the HSE SKILL Programme, the Health Services National Partnership Forum and other grossly dysfunctional State entities which have shattered public confidence after the wanton squandering of hundreds of millions of euro with abandon.

Transparency has not compromised the ‘operating model ‘or the efficiency and effectiveness of any the debt management agencies in any other OECD country.  The transparency of these agencies would also suggest that the NTMA is an excessively costly agency compared to its counterparts.

NTMA Costs and Operating Efficiency

The activities of NTMA remained substantially the same in scope between 2000 and 2008 with the exception of the establishment of the National Development Finance Agency in 2003.  Between 2000 and 2007 Ireland’s national debt ranged from €36.5 billion to €37.5 billion.  It increased to €50.3 billion in 2008, an overall increase of 38% since 2000.

But the operating costs of NTMA in that period increased by 314% and remuneration, including superannuation, by 365%.

NTMA held nine bond auctions in 2009 and raised €35.4 billion which brought the National Debt to €75.1 billion.  Salary and pension costs were €22.86 million, or an average of €135,384 per person.  Total expenses in 2009 at €39.4 million were significantly ahead of other OECD government debt management offices.  Debt servicing costs as a percentage of year-end national debt, excluding sinking fund payments, in this period were:

 

2000	5.74%
2001	5.25%
2002	4.66%
2003	4.78%
2004	4.53%
2005	4.61%
2006	5.31%
2007	4.29%
2008	5.24%

Australian Office of Financial Management

The Australian counterpart of NTMA is the Australian Office of Financial Management (AOFM). It raised €38.9 billion by approximately 100 competitive tender in the year to 30 June 2010. Apart from managing the Australian national debt AOFM invested €12 billion in residential mortgage-backed securities to provide funding for small mortgage lenders.  Total expenses for the year amounted to €11.5 million – less than ⅓ of what it costs to run NTMA.  The salary, pension and fringe benefits of Neil Hyden, the recently retired chief executive of AOFM, cost €250,000.  The remuneration, superannuation and fringe benefits of the 36 staff of AOFM amounted to €3.94 million in the year to 30 June 2010, or an average of €109,502 per person.   Approximately 60% of Australia’s government bonds are held by non-Australian residents - compared to 84% foreign ownership in the case of Ireland’s Government bonds.

HM Debt Management Office

The British counterpart of NTMA is the Debt Management Office.  Employing a staff of 112 persons, it raised €267 billion on the bond market in the year ended 31 December 2009 in 58 major and 13 minor auctions – a scale of borrowing 7.6 times greater than that of NTMA.  The activities of the DMO also include the administration of the UK Credit Guarantee Scheme in respect of debt issued by banks and building societies and the Emissions Trading System in the UK.  The salary, pension and fringe benefits of Robert Stheeman, Chief Executive of the DMO was €188,000 – some €12,000 less than the 2009 bonus of Dr Somers.  The net operating cost of DMO operating in the City of London in 2009 was €18.5 million – less than 50% of the overhead to run the NTMA in Grand Canal Street Dublin.

Chief Executive’s Bonus

It was officially disclosed last week that Dr Michael Somers, the founding chief executive of NTMA received a bonus of €200,000 in respect of 2009.  It was reported in the media last September that Dr Somers received a bonus of €400,000 apparently bringing his total remuneration to €1 million.

Ireland enjoyed the considerable advantage of lower level government debt relative to GDP for much of the decade to 2008.  Investor perception of Ireland was positive and reflected in excellent credit ratings; an economy that was perceived to be robust; a positive fiscal outlook and attractive yields on Irish debt.  Irish debt was adopted enthusiastically by investors.  There is no withholding tax on Irish bonds thus removing a barrier to investment for foreign investors unwilling, or unable to invest in assets subject to withholding tax.  Was this bonus merely based on surfing these positive circumstances or what precisely was Dr Somer’s contribution to making a distinctive difference which benefited taxpayers?  The citizen is left scavenging the internet for clues because the agency conveys no information whatsoever  on this issue.  The public are treated with the same bland contempt that occurred days before the recent arrival of the IMF and ECB to take economic control by the scruff of Ireland’s emaciated neck.

It would be helpful  if this key agency of the Department of Finance were to publish the fullest details of all executive remuneration for each of the last 10 years.  This, in the case of bonus payments should identify achievements against particular objectives and confirmation of who approved objectives, achievement and bonus payments. 

Department of Finance Code, 2 October 2001

State bodies, including the subsidiaries of such bodies, are required in the conduct of their operations to adopt this Code of Practice promulgated by the Department of Finance and advocated by the Director of Corporate Enforcement.

The Code of Conduct for the Governance of State Bodies states that the remuneration of a chief executive of a State agency and the remuneration of the chief executive of any subsidiary should be subject to audit and set out in the entities annual report which should state:

• The basic salary
• Payments made under a performance-related pay scheme
• The total value of the chief executives superannuation benefits, with a breakdown between standard entity superannuation benefits and any additional benefits  being provided for the chief executive

NTMA has consistently disregarded this guidance.  S6.(3) of the National treasury Management Act 1990 provides that the terms and conditions relating to the remuneration of the Chief Executive of NTMA are determined by the Minister for Finance after consultation with the Advisory Committee – on which the Secretary General of the Department of Finance is an ex officio member.  State agencies are required to implement Government pay policy, as expressed from time to time, in relation to other staff, including the chief executive and other staff of any subsidiary.

The Department of Finance, in the case of NTMA, is expected to be consulted, according to this guidance,  in good time on any pay proposal, or likely development, that could have significant implications for (i) general Government pay policy (ii) NTMA finances (iii) charges for goods and services provided and / or (iv) other areas of the public sector.  Compliance with Government pay policy, or with any particular Government decision, should not be effected in ways which cut across public service standards of integrity or conduct or involve unacceptable practices which result in a loss of tax revenue to the Exchequer.

The annual report of a State entity should include a schedule of the fees and aggregate expenses paid to each of the directors – or, presumably, in the case of NTMA, to each member of the Advisory Committee

There is, therefore, an obligation on the Secretary General of the Department of Finance to explain the remuneration trends at NTMA and very particularly, the remuneration arrangements between the chief executive and the Minister for Finance to the Public Accounts Committee.  How can he sit on the Advisory Committee and observe long-standing policies of his own department ignored?  That slipshod attitude to supervision allowed FÁS function as a ceded territory dominated and unilaterally controlled and dominated by the chief executive who, in practice was accountable to nobody.

Consultancy & Legal Expenses

NTMA has become a large-scale purchaser of legal and consultancy services.  Details should be provided of the number and value of contracts in each financial year, differentiating between new and existing contracts. 

The annual report should, in the case of consultancy contracts with a value of €10,000, or more, identify the consultant concerned; describe the service provides; confirm the price of that service; details of the selections process and the justification for using the services – to demonstrate transparency and compliance with relevant regulations and directives.  Taxpayers should not have to scavenge internet search sites or surveys of the highest revenue earning professional firms in Europe to distil how much revenue Irish professional firms are obtaining from public sources.

The Moral Hazard of the Banks' Bail Out

Six Irish banks are being bailed out by the State because of their systemic importance. This is supposed to mean that the consequences of their failure would have an adverse, far-reaching impact on the economy and the financial welfare of the country. Taxpayers are naturally concerned that if large scale public resources are committed that these are used to create repair a problem not to make those who caused the problem richer and this can arise in many ways including the valuation of assets and liabilities and through the derring-do of executive and non-executive leadership.

The resources required in Ireland to bail out banks are enormous in the context of our resources – potentially 50% of Gross Domestic Product. If Ireland were to experience a 10% drop in GDP this year, which could happen, the recession we speak of would become a depression. Foreign lenders are becoming ever more cautious. Tax revenue has collapsed from €47 billion in 2007 to a potential €34 billion in 2009. Taxes and levies have been raised several times in the past 12 months and Government spending has been curtailed. These initiatives are designed to impress lenders and the rating agencies' but it will aggravate the downturn. The guarantees and the direct investment provided to the banks could even strain the long-term solvency of the country and this puts further strain on the country.

There are many uncertainties in relation to the bank bailout and one of these is the consequence of moral hazard. Moral hazard arises when banks make choices in the light of Government support that would not make were this not available. A glaring example relates to the disclosure of losses arising from impaired loans. Last week AIB announced that it has increased the amount being set aside to cover impaired loans from €106 million to €1.8 billion. Irish Nationwide Building Society has announced a loan loss impairment charge of €464 million, increased from €48.8 million in 2007. The loan loss impairment charge was €17.6 million in 2006; €27.2 million in 2005 and €6.5 million in 2004.

Following the publication of a 9-bullet point press release last Friday, the Taoiseach has announced that this institution is to join the bailout fraternity. Irish Nationwide announced a loss of €243 million after this very large loan loss impairment charge. The common understanding of a building society is that of providing house loans to members from the proceeds of members' savings. The risks involved would be fairly widely dispersed and thus moderate.

Irish Nationwide had residential mortgages of €2.547 billion in 2007, down from €2.599 billion in 2006. 98% of these were in Ireland and 28% related to houses in Dublin. But Irish Nationwide also had commercial mortgages amounting to €9.785 billion of which only 37% were in respect of Irish properties (16% in the Dublin area). 53% of the commercial mortgages were in Britain (34% in London). The total loan book in 2007 was €12.332 billion. This has was reduced to €10.474 billion in 2008.

Ireland had become very dependent on tax revenue derived from construction such as capital gains tax, stamp duty and corporation tax. But the drop in tax revenue from these sources has been dramatic reflecting the burst bubble of the construction sector. Capital gains tax has dropped by 54%; stamp duty by 48% and corporation tax by 20%.

The reserves of the Society in 2008 were stated to be €1.2 billion, a reduction from €1.51 billion in 2007. However, the 2007 figure included a property revaluation reserve, of which €67 million, but the property values of 2007 no longer prevail.

Irish Nationwide makes a point each year of commenting on its cost-income ratio which in 2007 was 17%, “which continues to be the lowest of any Irish financial institution”. A wonderful accomplishment when directors’ emoluments amount to €3.49 million – 78 times the average annual pay of the 400 staff of the Society (€44,500).

If 50% of Irish Nationwide's loan book concerns transactions outside this country, to what extent is it of systemic importance to Ireland? How valuable is the Irish Nationwide franchise? A strong franchise is derived from a strong competitive creates pricing power and a status that can make it a sought after acquisition target. Why did Irish Nationwide never cede its mutual status and become an acquisition candidate? Does its reluctance offer any insight into the real quality of its business and prospects? Are its problems fundamentally different in character to other covered institutions?

The moral of all of this generally is that taxpayers need to be extremely vigilant as to whether Government intervention repairs the banks and building societies, or merely affords an opportunity to those who control them to enrich themselves through ‘adjustments’ that would never see the light of day if Brian Lenihan was not standing by with buckets of your hard-earned money! The issue concerns what is called ex post accountability - whereby problems are resolved after uncertainty has been resolved, or thought to be resolved. But as we are living in a country where the Finance Minister indicates that serving politicians are to forego political pensions, while serving in elected office and less than two weeks later his boss indiciates that this measure will only apply to the politicians of tomorrow, doesn't inspire confidence that this Government has the savvy to really understand the implications and vulnerabilities of its bail out initiative.