Transcript Slide 1

WHAT’S CHANGED POST THE
FINANCIAL SUSTAINABILITY INQUIRY?
Presented by
John Comrie
FMG Seminar
27 March 2009
FS INQUIRY FINDINGS
over-emphasis on managing for the present
excessive willingness to spend more on
services
infrastructure spending too low
lagging asset management practices
persistence of cash accounting as a basis for
reporting and decision-making
perception by councils of being in a better
position than they really are
INQUIRY PROPOSALS
better focus on operating result
more financial governance education and
training
use debt to address asset management
(councils’ net debt levels very low)
implement long-term financial plans and asset
management plans
establish audit committees
RESPONSE TO INQUIRY
COMPREHENSIVE LGA FINANCIAL
SUSTAINABILITY
SUPPORT PROGRAM
Developed with strong support of FMG
KEYS TO FINANCIAL SUSTAINABILITY
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Determining & Using Financial Targets
Financial Reporting
Appropriately Estimating Depreciation
Affordable Optimal Asset Management
Sound Long Term Financial Plan
Funding Policies & Rating Strategies
Optimal Use of Loan Funds
DETERMINING & USING FINANCIAL
TARGETS
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use LG sector endorsed financial indicators to
guide decision-making
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set targets/target ranges for aspired future
performance (particularly operating result ones)
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has your Council adopted these indicators and
set appropriate targets?
FINANCIAL REPORTING
Councils should ensure:
clear and simple big picture focus
based on accrual accounting
rate determination statement discontinued (it
is misleading)
disclosure of financial performance against kpi
targets
APPROPRIATELY
ESTIMATING DEPRECIATION
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Difficult to measure but important to do so as
well as possible in order to aid decision-making
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Councils need to ensure that
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outlays are appropriately expensed or capitalised
asset lives and residual values are reliable
major components with varying lives separately
identified
assets regularly revalued
AFFORDABLE AND OPTIMAL ASSET
MANAGEMENT
Be careful re use of grants and stringent re asset
holdings and ensure fit for purpose - no point in having
‘Rolls Royce’ if don’t need or can’t afford to maintain
Asset management plan should provide for
maintenance and replacement timing to minimise whole
of life costs and achievement of service standards
required and designed into assets
Cashflow constraints should be resolved through longterm financial plan not the asset management plan
LONG-TERM FINANCIAL PLANS
should drive affordable service level and funding
and financing decisions
based on achieving financial kpi targets - if not
feasible then need to review revenue and
service level proposals
FUNDING POLICIES & RATING
STRATEGIES
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should consider benefit principle and capacity to
pay in determining who pays what
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are benefits from provision of various services
more of a public or private good character? – if
latter consider greater use of user pays
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LG Act provides considerable revenue raising
flexibility
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if a council has an operating deficit then it is
providing more services than it is charging for
OPTIMAL USE OF LOAN FUNDS
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‘most councils have capacity to better serve
communities by making greater use of debt’
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a break-even operating result will not generate
sufficient funds to finance acquisition of new,
additional assets – it is equitable to borrow if
necessary
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low interest rate environment is excellent time to
undertake cost-effective and affordable capital
works
SOUND TREASURY MANAGEMENT
Most councils have scope to reduce risk and save money
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cash and investments should normally be used in
preference to additional debt
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only borrow when need funds
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not for particular project
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don’t lock in long-term if likely to have surplus cash in
future
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manage interest rate risk exposure by spread of fixed
and variable rate borrowings
CHANGES IN PERFORMANCE
BETWEEN 98/99 & 06/07
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Operating Result improved from $84m deficit to
$8m deficit
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Operating Surplus ratio fell from -17% to -1%
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Asset renewal outlays increased from $55m to
$225m
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Net Financial Liabilities fell by 40% (real terms)
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Interest Cover ratio fell from 2.4% to 0.8%
CONCLUSION
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Financial performance and position of almost all
councils has improved markedly in recent years
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Many have made significant changes in their
financial strategies, policies and procedures
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Most can still realise additional improvements
through embracing other opportunities
identified through the LGA and FMG financial
sustainability improvement initiatives
LGA FS INFORMATION PAPERS
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No.1 - Financial Sustainability
No. 6 - Infrastructure and Asset Management
No. 8 - Long Term Financial Plans
No. 9 - Local Government Financial Indicators
No.10 - Debt Management
No.12 - Local Government Financial Targets
No.13 - Model Framework for Council Annual Business Plans
No.15 - Treasury Management
No.16 - Long Term Financial Plan (Model Format)
No.17 - Depreciation and Related Issues
No.18 - Financial Policies
No. 20 - Funding Policies and Strategies (forthcoming)
No. 21 - Internal Financial Controls
No. 23 - Financial Governance
above and other papers and support material (eg model budget template and model
financial statements) available on www.lga.sa.gov.au/goto/fsp
WHAT’S CHANGED POST THE
FINANCIAL SUSTAINABILITY INQUIRY?
Presented by
John Comrie
FMG Seminar
27 March 2009