Long Term Financial Plan

Aim

The Financial Plan seeks to demonstrate prudent financial governance to the community and external stakeholders by establishing the framework for sound and sustainable decision making. It will also assist in the development of Council’s annual operational plan and yearly budget.

Objectives

To satisfy the needs of community for relevant information on the financial affairs of the council.

To achieve financial sustainability over the next ten years. To provide good financial management, giving fiscal security assurance to the council and

the community To reflect a responsible blend of services and facilities by the prudent use of available

revenue sources To consider the whole of life costing on the implementation of new and future assets and its

impact on the region’s future community.

Executive Summary, Vision and DirectionsFinancial management within Bundaberg Regional Council supports the delivery of the objectives identified within Council’s Community Plan and ensures that financial resources are allocated according to the annual priorities set by Council in achieving that vision, within the parameters determined through the long-term financial planning. The long term financial plan is an integral part of the local government planning framework depicted below:The plan is informed by not only the Bundaberg Regional Community Plan 2031 and the Bundaberg Regional Council Corporate Plan 2009-2014, but also the latest information available at the time of its preparation with respect to:• Master Planning Documents, inclusive of the Bundaberg Region Social Infrastructure Strategic Plan and Sport and Recreation;• Infrastructure Schedules included within the current town planning schemes within the region;• Latest population growth estimates from relevant sources;• Most recent estimates of development activity;• Asset Management Plans for the various classes of assets.All financial decisions are made in the context of long term financial sustainability with funding decisions having due regard to intergenerational equity, so that those who enjoy the benefits of assets and services provided by Council contribute to the funding of those assets and services.

Conversely, assets and services that are consumed in the short term do not place a financial burden on future generations. Financial decisions are guided by corporate policies, strategies and principles of effective financial management.

Rates and ChargesCouncil applies the principles of equity, effectiveness and efficiency, simplicity and sustainability.Council aims to raise sufficient revenue to:

Ensure a balanced budget and provide a strong financial basis for effective management of expenditure programmes and debt;

Provide sustainable services to the community based on principles of intergenerational equity and deemed capacity to pay for Council services;

• Sustain operating capability on a long-term basis; Encourage a strong, growing and sustainable local economy with appropriate levels of

infrastructure assets and facilities; and Provide certainty of funding for the provision of infrastructure and services identified by

Council in its long-term strategic financial plans.

Sustainability IndicatorsCouncil uses the financial sustainability indicators mandated in the Local Government Act 2009 plus other measures to assist in monitoring financial sustainability.As is the case with all forecasts, circumstances change and these sometimes impact on the financial forecast and can negatively affect the sustainability ratios. When this occurs, Council will develop strategies to bring the forecast back to a sustainable outlook in the long term.

Operating PositionThe net operating position (operating revenue less operating expenses) indicates the extent to which Council is raising sufficient operating revenue to cover operating expenses. Council aims to achieve a positive operating position in each financial year of the long-term financial forecast as an indication that expenditure is being managed within the available revenue projections.Council must make all endeavours to ensure a balanced budget is adopted each financial year, and seeks to achieve reliable and ongoing revenue sources to fund recurrent operating expenditure. One-off revenue sources should not be used to commit to new recurrent expenditure, thereby ensuring that new, ongoing (recurrent) expenditure commitments have a reliable revenue source, not only in the current budget year, but for future years – thus, promoting financial sustainability.

Asset ManagementCouncil continues to place particular importance on ensuring the standard of assets in the region remains high. To this end asset management plans have been developed for the eight classes of assets under Council’s control; namely:•Land & Improvement; • Buildings and Structures;• Plant & Equipment;• Cultural Assets;• Roads, Footpaths and Bridges;

• Stormwater Drainage;• Sewerage Infrastructure;• Water Infrastructure.

The Local Government Act 2009 requires local governments to place an even greater focus on asset management with the development of more comprehensive asset management plans and the integration of these plans with the long term planning process.The intention of this increased focus is to ensure an appropriate amount of the annual budget is dedicated to operating, maintaining and renewing assets, thus supporting service standards in the region.An improved asset management framework will deliver better financial data for financial planning and thus further promote financial sustainability.It is recognised that this is an evolutionary process and that as Council’s asset management systems and data analysis mature, so will the outputs from these plans that feed into the Long Term Financial Plan.

Capital InvestmentCouncil invests a significant amount of the annual budget into community and infrastructure assets to enable the delivery of services to the region’s residents and visitors.Financial management necessarily requires balancing the level of rates burden on property owners with the demand for assets and services within the region. This requires planning for ‘whole of life’ costs for new assets including operating, maintenance, renewal and financing costs. The long term financial forecast seeks to capture these costs to avoid underestimating the true cost of constructing or acquiring a new asset.

Cash InvestmentsA significant proportion of Council’s revenue is received twice a year in conjunction with the annual rates levy. This causes a spike in Council’s cash held after each rating period, with the cash to be used for budgeted purposes through to the next rating period.This cash flow profile requires prudent cash management processes to ensure funds are invested to maximise returns within the bounds of Council’s conservative risk profile and also to ensure sufficient cash is on hand when required to meet obligations to employees and suppliers. A number of internal policies, controls and procedures are maintained to ensure the integrity of Council’s funds. Council’s policies are guided by the Statutory Bodies Financial Arrangements Act, which sets the bounds for acceptable investments.The portfolio is managed with consideration given to the interest rate offered, the credit rating of the institution, with the term of the investment being dependent on future cash flow requirements and the prevailing outlook regarding interest rates. Once investments are made, Council holds those investments to maturity.Council’s Investment Policy is reviewed annually to ensure that it is structured appropriately to strike the balance between maximising returns and protecting Council’s investment portfolio. Refer to appendix ???

DebtDebt is only used for capital purposes. The term of the debt is matched, as best as possible, to the life of the asset up to the maximum term imposed by Queensland Treasury Corporation (QTC).

Borrowings usually have terms of 3, 6, 9, 12 or 15 years. For major capital projects, with a reliable income stream, debt will be borrowed over the maximum term of 20 years.The level of borrowings drawn each financial year is carefully monitored through long-term financial modelling to ensure affordability. A number of financial measures are utilised to assess sustainability, including those mandated by legislation. In addition to internal assessments, Council is required to submit an annual application to the State Government, which includes the long-term financial forecast, to gain approval for all planned borrowings.QTC periodically undertakes a detailed credit assessment of Bundaberg Regional Council, with Council 2011 review providing a moderate rating with a developing outlook, this was based on Council’s adopted budget and forward planning at that time.The external debt assessments focus on the macro view of Council’s ability to repay debt. However, Council manages debt at a more detailed funding level internally, further ensuring the financial sustainability of borrowing decisions. Council seeks to minimise general rates as a funding source to repay debt, preferring to rely on specific revenue sources (water charges, sewerage charges, airport fees etc) that are matched to the infrastructure being constructed.Each year there is an amount of general borrowings that relies on the general rate as a funding source, but this is kept to a minimum, and under the current long term financial plan this is planned to reduce over the 10 year period.This ensures that Council is in a position to fund critical assets in areas that do not have a separate revenue source.

Our Long-term Financial OutlookCouncil regularly models financial performance, financial position and cash flow forecasts to monitor the long term sustainability of financial decisions. Projected financial statements for the ten year period through to 30 June 2022 are included in the 10 year long term financial forecast.The long term financial forecast is set amidst the competing backdrops of increased demands for the provision of Council services and infrastructure to keep pace with the current aging population growth within the region, but also significant capital revenue constraints as a result of a series of State Government decisions over several years that has seen the removal of the 40% capital grants and subsidies, as well as the capping of infrastructure charges from new development.The yearly budget and this long term financial forecast continue to apply the principles endorsed by Council, particularly with respect to:

• The continued implementation of the planned price paths for utility charges. To this end the long term financial plan is based on pricing decisions in the respective utility schemes that aim to achieve a postage stamp price for those services across the region. This is expected to be achieved within Waste Charges by 2015/16, Water Charges by 2018/2019 and within Sewerage Charges by 2019/2020. The price paths for Water Access Charges, Water Consumption Charges and Waste Disposal fees are developed and implemented over the period of this plan.

• Continual review of operations to ensure that the operating position is optimised by one or more of the following means:

1. Reducing costs through operational savings or reduced service delivery;2. Ensuring that overheads are appropriately recovered;3. Increasing charges; and/or4. The restructuring of operations which may include the involvement of the private sector or

investigating the divestment of all or parts of some activities.Some of the key challenges to be managed by Council include:

• Asset ManagementCouncil’s infrastructure is relatively old and is in a variety of conditions. As a result, preparation of future budgets will need to take a planned approach to funding the ongoing maintenance and renewal of infrastructure assets to ensure long term sustainability of Council services. To support this, Council is in the process of further advancing the Asset Management Plans for infrastructure assets in order to provide a better picture of the costs and risks associated with current levels of asset-based services.The long term financial plan is based on current service levels for the respective asset classes. These service levels continue to be reviewed (either to an increased level or to a reduced level) and the impact of any proposed changes in service levels on Council’s Long Term Financial Plan will be assessed.

• Community Facilities and Infrastructure ProgramCouncil has a significant plan to improve the standard of community infrastructure in the region through the Bundaberg Region Social Infrastructure Strategic Plan, as well as the Council’s Park & Recreation Facilities Hierarchy and service level document and plans.These plans identify the strategic needs for the Bundaberg Region in these areas and including swimming pools, youth facilities, community facilities precincts and libraries.A modest amount of funds has been set aside for this purpose and works are continuing, but more funding is required to complete the full 10 year capital plan and the associated operating and maintenance costs that result from any new infrastructure. Funding sources to complete the full program will need to be considered as part of future financial planning.

• Infrastructure ChargesInfrastructure charges are raised from developers to help meet the cost of new infrastructure that Council must provide due to the growth of the region. The State Government’s cap on infrastructure charges and a change to the timing of when Council can collect the charges from developers came into effect from July 2011. The full impact of these changes is another issue that Council must carefully manage over the next few years, as Priority Infrastructure Plans as part of the development of the new Bundaberg Regional Council Planning Scheme are finalised.

Major Infrastructure and Service Delivery Area Capital ExpenditureAs part of the long term financial planning, it is proposed that the 10 year financial plans are to be developed and maintained for major service areas, which will enable planning at a more detailed level for the delivery of major infrastructure and services to the community. These plans, which represent the majority of the total capital spend in the financial forecast period, are at varying levels of development for the various asset classes. They are to be reviewed at least annually and incorporated into the corporate financial forecast. As planning and asset management systems become more informed, these figures are expected to change at each revision due to trigger points for various projects being met, which may lend itself to more certainty with respect to both expected expenditure and its associated timing. Capital expenditure forecasts for the major service areas are shown in the current 10 year financial forecast.It should be noted that many proposed projects and associated indicative capital expenditure included in Council’s 10 Year Financial Forecasts are contingent on finding appropriate funding sources. Funding solutions for all proposed asset investments are continually reviewed as part of the planning process. As this is Council’s initial long term financial plan it is expected that the identified capital funding in this plan is a “worst case” scenario, with projects not likely to proceed unless there is an appropriate funding source.It is proposed to follow the following matrix when implementing Council’s financial strategy:

The 10 year estimates will be performed at a high level, serving as a guide only given the extended time frame involved. It is anticipated that the 3 year timeframe will be more robust allowing significant lead time for systematically scoping, drawing and approving projects; thereby enabling Council to budget with a greater degree of certainty in each budget year.

Financial Forecast

Section 104 of the Local Government (Finance, Plans & Reporting) Regulation 2010 sets out thelegal responsibilities for financial forecasting as follows:Section 104(1) A local government must, at least annually, prepare a long-term financial forecast.(2) A long-term financial forecast must –a. Contain a forecast of the following for each year during the period of the forecast:i. Income;ii. Expenditure;iii. The value of assets, liabilities and equity; andb. Including the following documents covering each year of the period of the forecast:i. A statement of financial position;ii. A statement of cash flow;iii. A statement of income and expenditure;iv. A statement of changes in equity.(3) The long-term financial forecast must also state the relevant measures of financial

sustainability for the period of the forecast.

Council will prepare a 10 year forecast with the prescribed statements and, additionally, a Capital Funding Statement.

The capital expenditure program per asset class as a percentage of total asset expenditure averaged over the 10 year period will be according to the following:

Asset class % target % in forecast

Roads & Drainage 40-60% 50%

Water Infrastructure 10-20% 10%

Sewerage infrastructure 10-20% 20% Including commencing upgrade & relocation to the East treatment plant

Buildings 5-10% 7%

Land 2.5-7.5% 4%

Plant & Equipment 5-10% 9%

Operating Forecast Range

The range of operational revenues and expenditures council has set as parameters

Operational Item Key Driver Range General Rates Property Growth 0.5% to 2% General Rates Price Path 3.5% to 7%

Utility Charges Population Growth 1% to 3%Utility Charges Waste Price Path Full cost recovery Utility Charges Sewerage Price Path Transitioning to FCR Utility Charges Water Access Price Path Transitioning to FCRUtility Charges Water Consumption Price Path 2 part Tariff principles

Waste Refuse Disposal Fees Price Path Transitioning to FCRGeneral Fees & Charges Price Path CPI to LG Cost Index

Salaries & Wages EBA rate 2.5 to 5%Salaries & Wages Population Growth 1% to 3%Material & Services Construction Index 2% to 12%Material & Services Local Gov Cost Index 2% to 8%Material & Services Population growth 1% to 3%Material & Services CPI 1% to 4%Material & Services Productivity improvements -7% to -1%

Interest Earned Investment Rate 4% to 8%Interest Paid QTC Loan Rates 4.5% to 6.5%

Financial Indicators

Council uses a series of financial indicators to assist in monitoring its financial sustainability, which also serve to identify future year ramifications of decisions that are made in the present period. Notwithstanding these indicators, events outside the Council’s control or community expectations or a perceived benefit to the community may force Council to temporarily move outside the optimum range. A strategy would then be put in place to ensure Council reverts to its planned parameters.

Ratio Council State Operating Surplus – -4% to 8% -4% to 8%

Working Capital Cash -- > 3 months > 3 months

Current Assets/ Current Liabilities 3:1 3:1

Capital Expenditure: Depreciation 1.1:1 1.1:1

Total Liabilities: Operating Revenue 1.5:1 1.66:1

Annual Debt Payment: Operating Revenue<20% No target

Addendums

Forming part of this plan is the

Long term financial forecast,

Long term asset management plan

Investment policy

Revenue policy

Borrowing policy

Procurement policy