24 December 2004
Mr Chris Haines
New Zealand School Trustees Association
PO Box 5123
Dear Mr Haines
CROWN ENTITIES ACT 2004: IMPLEMENTATION OF FINANCIAL POWERS PROVISIONS FOR SCHOOL BOARDS OF TRUSTEES
In his letter dated 20 December 2004, Hon Trevor Mallard updated you on progress with the Public Finance (State Sector Management) Bill. The four resulting bills received the Royal assent on the 21 December. Hence this letter refers to the Crown Entities Act 2004.
We focus on implementation of sections 158 to 164 of the Act - namely, its financial powers provisions - for school boards of trustees (BoTs). These provisions deal with Crown entity bank accounts, and restrictions on the acquisition of securities, borrowing, giving of guarantees and indemnities, and use of derivatives. The latter restrictions are located in the Education Act 1989 as new sections 67, 67A, 67B and 73.
While the Crown Entities Act comes into force on 25 January 2005, its financial powers provisions will apply later - namely:
- bank accounts, six months after 25 January 2005 (i.e. 25 July 2005); and
- other financial powers, from 1 April 2005.
This timing is intended to allow adequate time for implementation. As discussed with you yesterday, we are providing further information on the understanding that NZSTA will assist seeking advice from BoTs of authorisations that they may require for business activities that would otherwise be precluded by the financial powers provisions, and any comments they or you may have on our drafting instructions for associated regulations.
Feedback Sought: Regulations and Joint Ministerial Approvals
The authorisations will take the form of regulations and - in the case of individual BoTs or classes of BoTs - joint approvals by the Ministers of Education and Finance. They should come into effect as soon as the financial powers provisions apply in order to accommodate new bank accounts and financial transactions (i.e. those not covered by the transitional provisions outlined below). Cabinet agreement to the regulations is likely be needed by 28 February 2005 to meet the 1 April 2005 deadline. Ministerial approvals could be obtained up to 31 March 2005.
Drafting instructions for regulations sent to the Parliamentary Counsel Office are included in Annexes A to C. They include framework provisions (such as credit-rating tests) applicable to all affected Crown entities, and authority for Crown entity groups, including BoTs, to depart from the default provisions.
In brief, the draft regulations cover:
- Definitions for the purposes of the regulations and sections 158 to 164;
- Regulation 1 and 3 - Credit-rating tests in relation to bank accounts and debt securities;
- Regulation 2 - Bank accounts held at a bank outside New Zealand;
- Regulation 4 - Grace period for debt securities that cease to satisfy the relevant credit-rating test;
- Regulation 5 - Definition of "borrow" extending that in section 136;
- Regulation 5A - Authority for school BoTs to borrow; and
- Regulations 6 and 7 - Permitted guarantees, indemnities and derivatives.
Regulation 5A seeks to maintain the status quo for BoT borrowing. Given that the remaining regulations are generic, we would expect few BoTs to have comments on our drafting instructions.
Unless you indicate otherwise, we hope that BoTs will be able to provide any feedback on the draft regulations, including any suggestions for extending the lists of permitted guarantees, indemnities and derivatives, which aim to meet normal business needs of all affected Crown entities. Comments would be appreciated by 10 February 2005. The Ministry of Education has been consulted.
Joint Ministerial Approvals
With respect to any joint Ministerial authority needed by individual BoTs or classes of BoTs, we should be grateful if NZSTA could coordinate feedback by 4 March 2005 on financial powers which are considered legitimate requirements for carrying out their functions. If this deadline proves impractical for a significant number of BoTs, then please keep us appraised of progress.
We understand that the material provided with this letter will be drawn upon and simplified for your communication and would be pleased to assist by commenting on a draft in early January. In our view, key messages are that:
- the financial powers provisions comprise a more cohesive and comprehensive approach that is designed to limit potential Crown fiscal risk;
- this framework should bring little operational change for most BoTs, in that the:
- bank account provision is similar to that currently applicable in the Public Finance Act 1989, subject to determining the position of TSB Bank Limited (which is discussed below);
- borrowing regime reflects the status quo under the Education Act;
- securities/investment provision is also similar to that presently applied in the Education Act; and
- no guarantees/indemnities and derivatives provisions currently exist for BoTs, in which case the new restrictions should serve to clarify the basis of any future transactions rather than alter past practices.
TSB Bank Limited
Your Association and several BoTs expressed a concern that the credit-rating test to be specified for registered banks under section 158 may preclude holding banks accounts at TSB Bank Limited (TSB). Subsequently, TSB sought an assurance from the Ministers of Finance and Education that it be permitted to conduct business with Crown entities.
In response, the Minister of Finance indicated that this issue will be considered within the six-month grace period after section 158 comes into force and in terms of subsection 158(1)(b), which allows that Minister to approve a registered bank and specify conditions for this purpose. Treasury will be working on this issue with the TSB and therefore BoTs do not need to include this as part of their returns.
Information to be Included in Requests
Requests by individual BoTs or classes of BoTs for financial powers authorities should be supported by reasons based in business need and provide an assurance about how any additional risk will be managed. The level of detail required depends on whether a BoT is seeking to:
- renew an existing authorisation, for which supporting analysis justifying business need and demonstrating capability to manage risk will be expected;
- extend the scope or limits of an existing authorisation, for which a similar analysis will be required together with reasons for the extension; and
- obtain a new authorisation for transactions not previously approved, for which a detailed explanation of business need and the risk management mechanisms to be put in place will be needed.
In each case, Treasury and the Ministry of Education will weigh up materiality and the level of risk before advising Ministers.
Process for Requests
We are conscious that our deadline falls close to the holiday period. It is, however, driven by the imminent application of the financial powers provisions. Please:
- direct any interim queries to Roger Beckett and Tyson Schmidt at Treasury (phone 471-5084 and 471-5926 respectively); and
- ask BoTs to send requests for financial power authorities to David Burrage at the Ministry of Education (phone (04) 463-8114).
The Ministry will coordinate with Treasury in seeking approvals from the Ministers of Education and Finance.
Information Annexed on Financial Powers Framework
The attached annexes elaborate the Bill's provisions, discuss operational and compliance implications, include our drafting instructions for associated regulations, and indicate procedures and information needed to support requests for authorisations to depart from the restrictions:
- Annex A: Bank accounts (section 158 of the Crown Entities Act).
- Annex B: Borrowing and acquisition of securities (new sections 67 and 73 of the Education Act).
- Annex C: Giving of guarantees and indemnities, and use of derivatives (new sections 67A and 67B of the Education Act).
Section 158 of the Crown Entities Act governs accounts held at registered banks, registered building societies, or banks outside New Zealand. The new Education Act provisions for other financial powers contain restrictions from which departures are possible only in terms of regulations, joint Ministerial approvals, or the Education Act itself.
In addition, for ease of reference:
- Annex D: replicates BoT financial powers provisions in the Education and Crown Entities Acts - together with related provisions, definitions and transitional arrangements;
- Annex E: replicates existing BoT borrowing and investment provisions in the Education Act, which will be repealed when the new provisions apply; and
- Annex F: provides a table that relates sections in the Crown Entities and Education Acts to corresponding clauses in the earlier Public Finance (State Sector Management) Bill.
If BoTs are satisfied that current authorities are sufficient for the short term, then they may wish to rely on the transitional arrangements outlined below.
Section 195 of the Crown Entities Act provides a six-month period of grace from 20 January 2005 for existing bank accounts after section 158 comes into force. During this period BoTs must continue to comply with section 24 of the Public Finance Act.
Other Financial Powers
Section 196 of the Crown Entities Act provides that existing law will apply until 1 April 2005, and section 197 contains a transitional authority for existing securities, borrowing, guarantees, indemnities and derivatives. This means that borrowing, acquisition of securities, etc lawfully transacted by BoTs before 1 April 2005 will not be affected by the new default provisions in the Education Act, but may be amended, and options may be taken up, on or after that date only if permitted by the Minister of Finance.
New financial transactions undertaken on or after 1 April 2005 must comply with sections 67, 67A, 67B and 73 of the Education Act, and any new bank accounts opened on or after 25 July 2005 must comply with section 158.
Beyond this Initial Round
Treasury and the Ministry of Education will liaise in coordinating the processing of initial requests concerning the regulations and joint Ministerial approvals. Beyond this, ongoing requests by BoTs for authorisations should similarly be directed in the first instance to the Ministry, which will consult Treasury.
We will produce further guidance next year to assist consideration of future requests for financial powers. This may form part of wider guidance on the Crown Entities Act 2004.
Public Sector Management Section
for Secretary to the Treasury