WHAT’S CHANGED POST THE FINANCIAL SUSTAINABILITY INQUIRY? FMG Seminar 27 March 2009 Presented by John Comrie

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 1. Determining & Using Financial Targets 2. Financial Reporting 3. Appropriately Estimating Depreciation 4. Affordable Optimal Asset Management 5. Sound Long Term Financial Plan 6. Funding Policies & Rating Strategies 7. Optimal Use of Loan Funds

DETERMINING & USING FINANCIAL TARGETS use LG sector endorsed financial indicators to guide decision-making use LG sector endorsed financial indicators to guide decision-making set targets/target ranges for aspired future performance (particularly operating result ones) set targets/target ranges for aspired future performance (particularly operating result ones) has your Council adopted these indicators and set appropriate targets? 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 Difficult to measure but important to do so as well as possible in order to aid decision-making Difficult to measure but important to do so as well as possible in order to aid decision-making Councils need to ensure that Councils need to ensure that outlays are appropriately expensed or capitalised outlays are appropriately expensed or capitalised asset lives and residual values are reliable asset lives and residual values are reliable major components with varying lives separately identified major components with varying lives separately identified assets regularly revalued 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 long- term 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 should consider benefit principle and capacity to pay in determining who pays what should consider benefit principle and capacity to pay in determining who pays what are benefits from provision of various services more of a public or private good character? – if latter consider greater use of user pays are benefits from provision of various services more of a public or private good character? – if latter consider greater use of user pays LG Act provides considerable revenue raising flexibility LG Act provides considerable revenue raising flexibility if a council has an operating deficit then it is providing more services than it is charging for if a council has an operating deficit then it is providing more services than it is charging for

OPTIMAL USE OF LOAN FUNDS ‘most councils have capacity to better serve communities by making greater use of debt’ ‘most councils have capacity to better serve communities by making greater use of debt’ a break-even operating result will not generate sufficient funds to finance acquisition of new, additional assets – it is equitable to borrow if necessary a break-even operating result will not generate sufficient funds to finance acquisition of new, additional assets – it is equitable to borrow if necessary low interest rate environment is excellent time to undertake cost-effective and affordable capital works 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 cash and investments should normally be used in preference to additional debt cash and investments should normally be used in preference to additional debt only borrow when need funds only borrow when need funds not for particular project not for particular project don’t lock in long-term if likely to have surplus cash in future don’t lock in long-term if likely to have surplus cash in future manage interest rate risk exposure by spread of fixed and variable rate borrowings manage interest rate risk exposure by spread of fixed and variable rate borrowings

CHANGES IN PERFORMANCE BETWEEN 98/99 & 06/07 Operating Result improved from $84m deficit to $8m deficit Operating Result improved from $84m deficit to $8m deficit Operating Surplus ratio fell from -17% to -1% Operating Surplus ratio fell from -17% to -1% Asset renewal outlays increased from $55m to $225m Asset renewal outlays increased from $55m to $225m Net Financial Liabilities fell by 40% (real terms) Net Financial Liabilities fell by 40% (real terms) Interest Cover ratio fell from 2.4% to 0.8% Interest Cover ratio fell from 2.4% to 0.8%

CONCLUSION Financial performance and position of almost all councils has improved markedly in recent years Financial performance and position of almost all councils has improved markedly in recent years Many have made significant changes in their financial strategies, policies and procedures Many have made significant changes in their financial strategies, policies and procedures Most can still realise additional improvements through embracing other opportunities identified through the LGA and FMG financial sustainability improvement initiatives Most can still realise additional improvements through embracing other opportunities identified through the LGA and FMG financial sustainability improvement initiatives

LGA FS INFORMATION PAPERS No.1 - Financial Sustainability No.1 - Financial Sustainability No. 6 - Infrastructure and Asset Management No. 6 - Infrastructure and Asset Management No. 8 - Long Term Financial Plans No. 8 - Long Term Financial Plans No. 9 - Local Government Financial Indicators No. 9 - Local Government Financial Indicators No.10 - Debt Management No.10 - Debt Management No.12 - Local Government Financial Targets No.12 - Local Government Financial Targets No.13 - Model Framework for Council Annual Business Plans No.13 - Model Framework for Council Annual Business Plans No.15 - Treasury Management No.15 - Treasury Management No.16 - Long Term Financial Plan (Model Format) No.16 - Long Term Financial Plan (Model Format) No.17 - Depreciation and Related Issues No.17 - Depreciation and Related Issues No.18 - Financial Policies No.18 - Financial Policies No Funding Policies and Strategies (forthcoming) No Funding Policies and Strategies (forthcoming) No Internal Financial Controls No Internal Financial Controls No Financial Governance No Financial Governance above and other papers and support material (eg model budget template and model financial statements) available on

WHAT’S CHANGED POST THE FINANCIAL SUSTAINABILITY INQUIRY? FMG Seminar 27 March 2009 Presented by John Comrie