LOCAL GOVERNMENT

FINANCIAL SUSTAINABILITY :

NEXT STEPS

John Comrie 6 Jun 2019

Fin Sustainability – can we do better?2

It’s over a decade since major local government financial sustainability

reviews were undertaken in most states

Consequently led to varying degrees:

More focus on the issue

Legislative reforms

Considerable training and guidance material/activity

Progress has been made, but…. 3

Many councils could still do more to secure ongoing financial

sustainability

Most councils can be financially sustainable by their own effort,

Eg: reasonable & modest policies re revenue raising and service levels

But: Rural councils with smaller populations & larger areas generally have

more challenges

Genuine asset renewal backlogs can in the main be satisfactorily

addressed where warranted

How?

Background4

Councils are far more asset intensive than other spheres of govt

LG assets are typically long lived (on ave about 40 years)

Above factors and councils stable, predictable, appropriate revenue

sources often not given adequate weight in setting financial strategies

Can’t have good asset management and determine affordable service

levels and intergenerationally equitable charging without

reasonable financial planning

sound asset accounting

appropriate financial strategies

All need to focus on long-run operating result!5

Underlying operating result (similar to Vic ‘normalised’ adjusted

underlying result), ie diff between op rev & expenses:

Net of major one-offs (eg FAGs timing)

Net of capital revenues

If can maintain satisfactory result on average over time then

people in aggregate are paying fairly for cost of services

any financial/asset management challenges can be overcome

My ESC rate cap work suggests:

still too much focus on short-run cash position

Limited confidence by councils in longer-term needs/implications

The top things to do better!6

A highlight of a certain TV show of my vintage was it’s weekly ‘Top

Ten’ countdown.

The top ten: Answer is not…. 7

‘Money, money, money’!

Most councils can be financially sustainable and provide reasonable service levels and asset renewal as warranted without a lot more money

In fact more money can without good planning make problems more challenging!

No.10: Improve basic financial skills 8

Those responsible at both officer & elected level often:

Don’t adapt recommendations/actions to the specific LG operating

environment

Tend to think of solutions more appropriate to their personal or other employment

circumstances

Are not necessarily good communicators in conveying key messages

My work for NSW ILGRP supported claim that most councils can be

sustainable if disciplined & strategic!

Ie, if work to good plans!

No.9: Keep financial info simple & strategic 9

Focus on bottom line & forward trends beyond a single year

Finance people are good at making financial reports long & boring!

(Ditto engineers responsible for asset management plans)

Report & focus on underlying (‘normalised’) operating result

Eg variable early payment of Commonwealth FAGs has caused confusion

for many councils. Is a non-issue. Report ‘normalised/adjusted’ results in

ongoing reports.

No.8: Better auditing 10

Some audit approaches in some states are better than others

Not convinced eg auditors in all cases have good understanding of

key fin data important to LG

appropriate accounting for infrastructure assets (eg basis for asset values, componentisation, useful lives, pattern of depn, appropriate use of residual values etc)

There’s sig degrees of diff in accounting practice between councils & diff approaches that seem to be accepted by diff auditors, eg:

Depn is not same as loss of asset condition

Should poorly used old buildings be valued & depreciated based on replacement cost (without impairment)?

Should AMPs be audited? – probably if keep clear & simple!

1

2

3

4

5

0 1 2 3 4 5 6 7 8 9 10

Co

nd

itio

n S

core

Years

Condition of Assets

Condition

1

2

3

4

5

Does condition measure value & condition change

depn/consumption?

Condition 1 DRC =

100% of CRC?

11

Condition 2 DRC =

75% of CRC?

Condition 3 DRC =

50% of CRC?

Condition 4 DRC =

25% of CRC?

Condition 5 DRC = 0%

of CRC?

No.7: Better long-term financial plans12

Need to be short, simple & implications easy to comprehend

Key assumptions need to be reasonable & clearly stated (eg assumed rate increases relative to assumed cpi)

Need to accommodate asset management plan projections - and if can’t then AMPs need to be revised (and consequential implications addressed)

Need to clearly highlight distinction between proposed expenditure for asset renewal & replacement (here & in budget & EOY fin statements) and for expenditure for new/upgraded assets

No.6: Asset managers financial understanding13

Too much disconnect between those who prepare fin statements & those who prepare AMPs

Often 2 very diff sets of data re assets

Need single reliable asset register (with data that both agree with)

AM staff need to be comfortable with fin data, understand why its important & what it’s saying (eg reported asset useful lives & implications of operating deficits)

Challenge fin assumptions & strategies & agitate to ensure adequate funds for asset renewal needs

No.5: Resolve asset renewal gaps14

Many councils have much greater capacity to address asset renewal

backlogs than they choose to remedy

Asset renewal ‘funding gap’ is often really an ‘unwilling to spend’ gap

Councils need to understand implications of addressing or not & accept

responsibility for decision & its implications

AMPs need to be based on clear ‘affordable & willing to fund’ service

levels

No.4: Better indicators & guidance 15

Better requirements & implicit & explicit guidance re financial indicators & targets

Some states have imposed better ‘rules’ & more/less appropriate requirements than others, eg:

Annual depn often not a reliable measure of what should be spent on asset renewal

One page of fin indicator results (with visual performance markers) is all that’s needed to make sound financial decisions

Annual Renewal needs are Independent of Depreciation

16

DepreciationAsset Lifecycle/AMPRenewalNeeds

Renewals > Depreciation

Renewals < Depreciation

No.3: Better financial reporting 17

Better requirements & implicit & explicit guidance re eg

Annual financial reporting formats

Often too detailed & confusing

Some states have imposed better ‘rules’ & more/less appropriate

requirements than others, eg:

reporting format tailored to LG circumstances

Highlights key information – eg operating result net of capital revenue & net

of gains on revals etc

No.2: Clearer publication of key results18

Publication of key data (eg indicators) in budgets, fin statements & LTFPs (eg graphical trend)

More use of ‘league ladder’ scoreboards re annual performance compared to other councils

Publication of simple aggregate comparative results is a powerful motivator to do better

Councils not doing well need to be able to articulate and justify their performance and actions

Some states currently do more of this than others although more consideration of what’s reported is warranted too

No.1: greater & better use of debt19

Recognise need for debt (eg asset intensive) &

overcoming debt aversion

Usually impossible to intergenerationally fairly charge service recipients

without making considerable use of debt

In most states councils are discouraged from making appropriate,

responsible use of debt (and using the most suitable types of debt)

Many councils report reasonable operating result but

claim they can’t afford to address asset renewal needs or

major warranted new capex – they often can!

Responsible use of debt is essential20

If not funded by a grant where does the cash for new assets come

from?

Over-charging existing ratepayers?

Deferring expenditure on asset renewal?

Targets suggested for debt levels often very conservative

Doesn’t mean all councils can have more

important to get other things right before jumping in - need good plans

first that demonstrate sound ongoing financial performance

Thank you 21

References22

Australian Infrastructure Financial Management Manual (IPWEA)

Long-term Financial Planning (ACELG/IPWEA Practice Note 6)

Debt is not a Dirty Word (Comrie/ACELG)

SA LG Model Financial Statements (LGA of SA)

NSW Local Government Fit for the Future – Comments on Assessment Criteria (Comrie for LGA NSW)

Roadmap to Financial Sustainability for Local Governments in NSW (Comrie for Independent Local Government Reform Panel)

Contact comrie@internode.on.net re availability