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Mid-Western Regional Council


Financial Assessment and Benchmarking Report

8 October 2012

Prepared by NSW Treasury Corporation as part of the Local Infrastructure Renewal Scheme


Disclaimer

This report has been prepared by New South Wales Treasury Corporation (TCorp) in accordance with

the appointment of TCorp by the Division of Local Government (DLG) as detailed in TCorp’s letters of

22 December 2011 and 28 May 2012. The report has been prepared as part of the Local Infrastructure

Renewal Scheme (LIRS) announced by the NSW Government.

The report has been prepared based on information provided to TCorp as set out in Section 2.2 of this

report. TCorp has relied on this information and has not verified or audited the accuracy, reliability or

currency of the information provided to it for the purpose of preparation of the report. TCorp and its

directors, officers and employees make no representation as to the accuracy, reliability or

completeness of the information contained in the report.

In addition, TCorp does not warrant or guarantee the outcomes or projections contained in this report.

The projections and outcomes contained in the report do not necessarily take into consideration the

commercial risks, various external factors or the possibility of poor performance by the Council all of

which may negatively impact the financial capability and sustainability of the Council. The TCorp report

focuses on whether the Council has reasonable capacity, based on the information provided to TCorp,

to take on additional borrowings within prudent risk parameters and the limits of its financial projections.

The report has been prepared for Mid-Western Regional Council, the LIRS Assessment Panel and the

DLG. TCorp shall not be liable to Mid-Western Regional Council or have any liability to any third party

under the law of contract, tort and the principles of restitution or unjust enrichment or otherwise for any

loss, expense or damage which may arise from or be incurred or suffered as a result of reliance on

anything contained in this report.


Index

Section 1 Executive Summary ...................................................................................................... 4

Section 2 Introduction ................................................................................................................... 6

2.1: Purpose of Report ............................................................................................................. 6

2.2: Scope and Methodology .................................................................................................... 6

2.3: Overview of the Local Government Area ........................................................................... 8

2.4: LIRS Application ................................................................................................................ 9

Section 3 Review of Financial Performance and Position ........................................................... 10

3.1: Revenue .......................................................................................................................... 10

3.2: Expenses ......................................................................................................................... 11

3.3: Operating Results ............................................................................................................ 12

3.4: Financial Management Indicators .................................................................................... 13

3.5: Statement of Cashflows................................................................................................... 14

3.6: Capital Expenditure ......................................................................................................... 15

3.6(a): Infrastructure Backlog ................................................................................................. 15

3.6(b): Infrastructure Status .................................................................................................... 16

3.6(c): Capital Program .......................................................................................................... 17

3.7: Specific Risks to Council ................................................................................................. 18

Section 4 Review of Financial Forecasts .................................................................................... 19

4.1: Operating Results ............................................................................................................ 19

4.2: Financial Management Indicators .................................................................................... 19

4.3: Capital Expenditure ......................................................................................................... 23

4.4: Financial Model Assumption Review ............................................................................... 23

4.5: Borrowing Capacity ......................................................................................................... 26

Section 5 Benchmarking and Comparisons with Other Councils ...................................................... 27

Section 6 Conclusion and Recommendations .................................................................................. 33

Appendix A Historical Financial Information Tables ................................................................... 34

Appendix B Glossary ................................................................................................................. 37


Section 1 Executive Summary

This report provides an independent assessment of Mid-Western Regional Council (the Council)

financial capacity and its ability to undertake additional borrowings. The analysis is based on a review

of the historical performance, current financial position, and long term financial forecasts. It also

benchmarks the Council against its peers using key ratios.

The report is primarily focused on the financial capacity of the Council to undertake additional

borrowings as part of the Local Infrastructure Renewal Scheme (LIRS).

Council has made one application for $4.5m relating to their regional swimming pools refurbishment

program.

TCorp’s approach has been to:

Review the most recent three years of Council’s consolidated financial results

Conduct a detailed review of the Council’s 10 year financial forecasts. The review of the

financial forecasts focused on the particular Council fund that was undertaking the proposed

debt commitment. For the Council, the project is being funded from the General Fund so we

focused our review on the General Fund.

The Council has been well managed over the review period based on the following observations:

While the Council has incurred operating deficits (excluding grants and contributions for

capital purposes) in 2010 and 2011, Council’s underlying result (measured using EBITDA)

has posted its strongest result in 2011

With a relatively small population, Council’s own source revenue is below the ratio benchmark

but Council has a track record of successfully applying for grants and contributions to boost

their total revenues and are confident there is a high degree of certainty regarding the majority

of this source of revenue.

Council has had sufficient liquidity as indicated by the Unrestricted Current Ratio and Cash

Expense Ratio remaining above their respective benchmarks over the three year period

Council had total borrowings that remained static over the three year period at $7.3m,

representing 1.4% of Net Assets.

The Council reported $101.3m of Infrastructure Backlog in 2011 with an infrastructure asset value of

$385.1m. Other observations include:

The Infrastructure Backlog has remained within a $5.0m variance over the three year period,

despite an increase in the total value of infrastructure assets of $130.1m over the period

following the Asset Revaluations

The largest asset class within the Infrastructure Backlog is public roads at 41.4% of the total

backlog

While funding is slightly below the benchmark for asset maintenance and asset renewals

investment, Council has adequately invested in capital expenditure over the three years. This

is indicated by the Capital Expenditure Ratio being above the benchmark in all three years.

This indicates the capex focus has been on new assets more than the renewal of assets.


The key observations from our review of Council’s 10 year forecasts for its General Fund are:

Council is forecasting to generate an operating deficit in all 10 years excluding capital grants

and contributions, although on an upward trend from 2012 to 2019

Council is forecasting sufficient liquidity throughout the 10 year period to service all short term

liabilities

Council’s level of fiscal flexibility is limited as Council’s own source operating revenue is

maintained at levels equal to or below the 60% ratio benchmark

Council is forecasting a capital expenditure shortfall over the 10 years of $13.7m when

compared to the cumulative depreciation

The forecast assumes current service levels are maintained across the 10 year period.

The key assumptions within the forecast appear to be realistic

In our view, the Council has the capacity to undertake the combined additional borrowings of $4.5m for

the LIRS project. This is based on the following analysis:

The DSCR is strongly above the benchmark of 2.0x in the 10 year forecast period

The Interest Cover Ratio is strongly above the benchmark of 4.0x in the 10 year forecast

We also believe that Council will have additional capacity to utilise further borrowings of up to

$13.3m in 2013 based on the current forecast results and TCorp’s calculations and

recommendations

Council may be able to utilise further borrowings above this amount, however all

recommendations for additional borrowings are made on the assumption that Council

continue to receive consistent operating grants and contributions similar to the annual totals

received in the last three years

Council is classified as a small regional town by DLG however the LGA essentially relies upon

rural economic sectors. The Council is dependent on grants, both operating and capital, to

enable them to meet their ongoing operating expenses. In 2011 the operating and capital

grants and contributions equated to 38.9% of total revenue.

In respect of the Benchmarking analysis, TCorp has compared the Council’s key ratios, on a

consolidated basis, with other councils in DLG Group 4. The key observations are:

Council’s financial flexibility was mixed, as indicated by the Operating Ratio which

outperformed the group’s average, and the Own Source Operating Revenue Ratio which

underperformed the group’s average over the review period

Council’s liquidity position was very strong and compared favourably with the group’s average

Council has a lower level of gearing than its peers. Its DSCR and Interest Cover Ratio were

very strong in the past three years

Council’s Infrastructure Backlog was above the group’s average and the benchmark

throughout the review period. Council’s asset maintenance and asset renewal compared

favourably to the group’s average although were generally below benchmark. Capital works

expenditure levels were sufficient and are forecast to remain strong over the medium term


Section 2 Introduction

2.1: Purpose of Report

This report provides the Council with an independent assessment of their financial capacity and

performance measured against a peer group of councils which will complement their internal due

diligence, and the IP&R system of the Council and the DLG.

The report is to be provided to the LIRS Assessment Panel for its use in considering applications

received under the LIRS.

The key areas focused on are:

The financial capacity of the Council to undertake additional borrowings

The financial performance of the Council in comparison to a range of similar councils and

measured against prudent benchmarks

2.2: Scope and Methodology

TCorp’s approach was to:

Review the most recent three years of the Council’s consolidated audited accounts using

financial ratio analysis. In undertaking the ratio analysis TCorp has utilised ratio’s

substantially consistent with those used by Queensland Treasury Corporation (QTC) initially in

its review of Queensland Local Government (2008), and subsequently updated in 2011

Conduct a detailed review of the Council’s 10 year financial forecasts including a review of the

key assumptions that underpin the financial forecasts. The review of the financial forecasts

focused on the particular Council fund that was undertaking the proposed debt commitment.

For example where a project is being funded from the General fund we focussed our review

on the General fund

Identify significant changes to future financial forecasts from existing financial performance

and highlight risks associated with such forecasts

Conduct a benchmark review of a Council’s performance against its peer group

Prepare a report that provides an overview of the Council’s existing and forecast financial

position and its capacity to meet increased debt commitments

Conduct a high level review of the Council’s IP&R documents for factors which could impact

the Council’s financial capacity and performance

In undertaking its work, TCorp relied on:

Council’s audited financial statements (2008/09 to 2010/11)

Council’s financial forecast model

Council’s IP&R documents

Discussions with Council officers

Council’s submissions to the DLG as part of their LIRS application

Other publicly available information such as information published on the IPART website


Benchmark Ratios

In conducting our review of the Councils’ financial performance and forecasts we have measured

performance against a set of benchmarks. These benchmarks are listed below. Benchmarks do not

necessarily represent a pass or fail in respect of any particular area. One-off projects or events can

impact a council’s performance against a benchmark for a short period. Other factors such as the

trends in results against the benchmarks are critical as well as the overall performance against all the

benchmarks. As councils can have significant differences in their size and population densities, it is

important to note that one benchmark does not fit all.

For example, the Cash Expense Ratio should be greater for smaller councils than larger councils as a

protection against variation in performance and financial shocks.

Therefore these benchmarks are intended as a guide to performance.

The Glossary attached to this report explains how each ratio is calculated.

Ratio Benchmark

Operating Ratio > (4.0%)

Cash Expense Ratio > 3.0 months

Unrestricted Current Ratio > 1.5x

Own Source Operating Revenue Ratio > 60.0%

Debt Service Cover Ratio (DSCR) > 2.0x

Interest Cover Ratio > 4.0x

Infrastructure Backlog Ratio < 0.02x

Asset Maintenance Ratio > 1.0x

Building and Infrastructure Asset Renewal Ratio > 1.0x

Capital Expenditure Ratio > 1.1x


2.3: Overview of the Local Government Area

Mid-Western Regional Council LGA

Locality and Size

Locality Central West

Area 8,758 km²

DLG Group No. 4

Demographics

Population (as at 30 June 2011) 22,318

% under 20 27%

% between 18 and 60 48%

% over 60 25%

Expected population in 2021* 22,300

Operations

Number of employees (FTE) 275

Annual revenue $55m

Infrastructure

Roads 2,413km

Swimming Pools 3

Infrastructure backlog value $101m

Total infrastructure value $385m

*this estimated population figure was stated prior to the estimated increase relating to the mining expansion

Mid-Western Regional Council Local Government Area (LGA) is located 250 km North-West of

Sydney.

The LGA’s key economic sectors include:

Agriculture – super fine wool, honey and thoroughbred horses are produced

Viticulture – there are approximately 4,500 hectares under vine and around 40 cellar doors

Mining – this is a rapidly expanding industry with five major coal mines in operation with a

further four proposed

Tourism – the LGA has over 280,000 tourists annually

Retail – there are more than 300 retail establishments in Mudgee, the growing regional

shopping centre

The average annual increase in population between 2006 and 2011 has been 0.8% p.a. Some

sources are projecting virtually zero growth in the population up to 2021 however Council have

highlighted that due to the planned expansion of mining in the LGA, a fact Council has little control of,

there could be an increase of up to 5,000 residents in the next five years related to this expansion. In

2011 Council were awarded the National Award for Excellence (small council) for Local Government,

one of only two awards made each year. This was presented to Council in relation to their


‘Inspire/Encourage/Enlighten’ project that sent a message to the community promoting the

opportunities available for its female employees.

Council manages infrastructure, property, plant and equipment (IPP&E) of $521.0m in 2011. This

includes:

$212.4m of road, bridge and footpath assets

$63.3m of water supply assets

$32.4m of sewerage assets

$5.5m of stormwater drainage

$31.2m of non specialised buildings

$28.5m of specialised buildings

$12.0m of other structures

2.4: LIRS Application

Council has made one LIRS application.

Project: Regional Swimming Pools Refurbishment

Description: Asset renewal works on three regional swimming pool facilities - Mudgee, Gulgong and

Kandos. This includes replacing the plant rooms, refurbishing the damaged pool environments (e.g.

concreting and tiles), rebuilding the amenities and front entrance at all pools and installing a disabled

access ramp at the Gulgong facility.

Amount of loan facility: $4.5m

Term of loan facility: 20 years


Section 3 Review of Financial Performance and Position

In reviewing the financial performance of the Council, TCorp has based its review on the annual

audited accounts of the Council unless otherwise stated.

3.1: Revenue

Key Observations

Total operating revenues have increased over the period by $1.8m. This was due to a 4.0%

increase in 2011 to $46.8m after revenues remained static in 2010.

Rates and annual charges are Council’s largest revenue source and have increased steadily

over the period at rates marginally above the IPART approved rate peg, with increases in

ordinary rates being the main contributor.

User fees and charges fluctuated over the period with the reduction in 2011 due to a $0.8m

reduction in the fees received from works on the state roads via the RMS along with a $0.5m

reduction in water supply services user charges. This reduction was due to excessive rainfall

in the year that impacted the demand for water supplies.

Council’s own source operating revenue has remained around 55% of all revenues for the

three years, highlighting Council’s need to attract and rely upon grants and contributions

funding to assist the provision of services to the community.

Operating grants and contributions also fluctuated over the period and increased by $2.4m in

2011. This increase was primarily due to a $2.0m contribution received from the RMS after

the December 2010 storm and flood damage. In total Council estimate $9.5m of damage

occurred, with $4.5m in compensation received. $1.1m of the reduction in 2010 was due to

20,331 19,520 18,717

9,678 10,783 10,357

1,722 1,7522,055

13,470 11,072 12,515

1,6141,884 1,365

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2011 2010 2009

Figure 1 - Revenue Sources for 2008/09 to 2010/11 ($'000s)

Rates and annual charges User charges and fees

Interest and investment revenue Grants and contributions for operating purposes

Other revenues


timing differences in relation to when the general purpose financial assistance grants were

received while there was also a $0.5m reduction in road and bridges contributions. The roads

and bridges contributions reduced as these were one-off items received in 2009.

3.2: Expenses

Key Observations

Total expenses have increased by $5.6m over the period, representing an average increase

of 6.5% p.a.

Employee costs increased marginally over the period by 1.6%. They increased in 2010 due

to increased defined benefit scheme superannuation payments and workers compensation

insurance payments but decreased in 2011 due to a reduction in employee leave entitlements

of $0.6m. The reduction in equivalent full time (EFT) employees from 283 in 2009 to 275 in

2011 contributed to limiting the increase over the period. The annual salary increases were

off-set by the overall reduction in the employee leave entitlements in line with the reduction in

employee numbers.

Materials and contracts reduced in 2011 as contractor costs reduced by $1.6m. One factor

for this is subsequent to the Asset Revaluations, Council now account for road/footpath

reseals as capitalised costs and not maintenance expense.

Depreciation has seen the largest increase of all expenses following the Asset Revaluations

and has increased by 55.9% to $15.1 over the period.

The net losses from disposal of assets have increased over the period. The 2010 and 2011

amounts include the disposal of infrastructure assets when they have been replaced however

$0.7m of the 2011 total related to a write-off of capital works in progress relating to Redbank

17,076 17,921 16,801

528 533530

10,26811,681

11,602

15,075 10,0589,670

4,6445,014

4,155

761406

33

0

10,000

20,000

30,000

40,000

50,000

60,000

2011 2010 2009

Figure 2 - Expenses for 2008/09 to 2010/11 ($'000s)

Employees Borrowing costs

Materials and contract expenses Depreciation and amortisation

Other expenses Net loss from the disposal of assets


Dam that is a one-off expense and has therefore been excluded from the 2011 net loss from

disposal of assets figure. Please see section 3.7 for further detail in this regard.

3.3: Operating Results

TCorp has made some standard adjustments to focus the analysis on core operating council results.

Grants and contributions for capital purposes, realised and unrealised gains on investments and other

assets are excluded, as well as one-off items which Council has no control over (e.g. impairments).

TCorp believes that the exclusion of these items will assist in normalising the measurement of key

performance indicators, and the measurement of Council’s performance against its peers.

All items excluded from the income statement and further historical financial information is detailed in

Appendix A.

Key Observations

Council’s operating result excluding the capital grants and contributions has been on a

downward trend with deficits posted in 2010 and 2011.

The static revenues against overall increasing expenses in 2010 and the specific increase in

depreciation in 2011 are the reasons for the worsening results, while the increased net losses

on the disposal of assets in those years have exacerbated the position.

Council expenses include a large non-cash depreciation expense, ($15.1m in 2011), which

has increased substantially over the past three years following the Asset Revaluations

process. Whilst the non cash nature of depreciation can favourably impact on ratios such as

EBITDA that focus on cash, depreciation is an important expense as it represents the

allocation of the value of an asset over its useful life.

(1,537)

(602)

2,218

6,198

8,022

10,084

(4,000)

(2,000)

0

2,000

4,000

6,000

8,000

10,000

12,000

2011 2010 2009

Figure 3 - Operating Results for 2008/09 to 2010/11 ($'000s)

Operating result (excluding capital grants and contributions)

Operating result (including capital grants and contributions)


3.4: Financial Management Indicators

Performance Indicators Year ended 30 June

2011 2010 2009

EBITDA ($’000s) 14,066 9,989 12,418

Operating Ratio (3.3%) (1.3%) 4.9%

Interest Cover Ratio 26.64x 18.74x 23.43x

Debt Service Cover Ratio 13.54x 9.24x 12.26x

Unrestricted Current Ratio 3.45x 3.07x 3.38x

Net assets ($'000s) 541,201 535,142 361,005

Key Observations

Council’s cash position measured using EBITDA, was reasonably consistent with the

strongest underlying performance in 2011 due to the decrease in expenses when depreciation

is excluded.

The Operating Ratio has progressively declined over the review period and was close to the

benchmark in 2011.

The DSCR and Interest Cover Ratio are well above the benchmark demonstrating that

Council can adequately service their current level of borrowings ($7.3m) while also indicating

that there is further capacity to utilise additional borrowings.

The Unrestricted Current Ratio is above the benchmark in all three years indicating Council

can adequately meet their day to day liabilities. Council adopts a conservative approach to

managing cash and keeps the majority of cash and investments (approximately $25.4m or

96% in 2011) in cash and cash equivalents rather than current investments.

The Net Asset position increased over the period as the Asset Revaluations increased the

value of IPP&E in 2010 by $165.9m for roads, bridges and footpaths and $6.5m for bulk

earthworks in 2011. There was also$5.3m IPP&E impairment to infrastructure recognised

against equity in 2011.

When excluding the Asset Revaluations, Council has increased the IPP&E asset base by

$26.8m over the review period, with asset purchases being higher than the combined value of

disposed assets and depreciation.

Council has total borrowings of $7.3m in 2011 equating to 1.4% of Net Assets.


3.5: Statement of Cash flows

Key Observations

Council’s cash and cash equivalents is showing a downward trend, and when investments are

included this trend remains. The reason for this has been the increased investment in IPP&E

in consecutive years in 2010 and 2011.

Overall cash and cash equivalents, and investments have reduced from $38.4m in 2009 to

$28.7m in 2011. Of the $28.7m, $19.5m is externally restricted, $5.5m is internally restricted

and $3.7m is unrestricted.

Within the investments portfolio of $3.3m, $1.0m is invested in current deposit accounts,

$1.0m is in NCDs/FRNs and $1.3m is in equity linked notes.

The levels of cash reserves along with the Unrestricted Current Ratio above the benchmark

highlights an adequate liquidity position with Council likely to have the capacity to manage

most irregular financial events that may impact the Council’s cash position.

Council may be able to increase the return on their cash and equivalents by apportioning a

larger amount to term deposits.

25,35430,030

33,259

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2011 2010 2009

Figure 4 - Cash and Cash Equivalents for 2008/09 to 2010/11 ($'000s)


3.6: Capital Expenditure

The following section predominantly relies on information obtained from Special Schedules 7 and 8 that

accompany the annual financial statements. These figures are unaudited and are therefore Council’s

estimated figures.

3.6(a): Infrastructure Backlog

The Council’s Infrastructure Backlog stands at $101.3m in 2011, a small increase from $99.1m in 2009.

Council’s Infrastructure Backlog figure has always been based on current cost estimates therefore the

backlog figure was not impacted by the increase in asset values following the Asset Revaluations.

The 2011 backlog is split between all five asset classes with public roads being the largest at $42.0m.

Sewerage reduced by $8.4m over the period, in part due to the sewer augmentation at Mudgee,

Rylstone & Kandos.

4%

41%

22%

31%

2%

Figure 6 - Infrastructure Backlog Composition for 2010/11

Buildings and other structures

Public roads (inc. footpaths and car

parks)

Water

Sewerage

Drainage works

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Buildings and other

structures

Public roads (inc.

footpaths and car parks)

Water Sewerage Drainage works

Figure 5 - Infrastructure Backlog for 2008/09 to 2010/11 ($'000s)

2011 2010 2009


3.6(b): Infrastructure Status

Infrastructure Status Year ended 30 June

2011 2010 2009

Bring to satisfactory standard ($’000s) 101,336 96,321 99,109

Required annual maintenance ($’000s) 7,847 6,246 9,335

Actual annual maintenance ($’000s) 6,670 6,582 7,432

Total value of infrastructure assets ($’000s) 385,142 376,734 255,062

Total assets ($’000s) 559,293 554,011 378,559

Infrastructure Backlog Ratio 0.26x 0.26x 0.39x

Asset Maintenance Ratio 0.85x 1.05x 0.80x

Building and Infrastructure Renewals Ratio 0.84x 0.85x 1.06x

Capital Expenditure Ratio 1.38x 2.27x 1.88x

Council’s Infrastructure Backlog Ratio has decreased from 2009 however this is due to a relatively

static backlog figure and an increase in the total value of infrastructure assets following the Asset

Revaluations.

Over the review period, Council has marginally under invested in maintenance as indicated by the

Asset Maintenance Ratio, with the total shortfall for the three years amounting to $2.7m.

The Building and Infrastructure Renewals Ratio was above the benchmark in 2009, however it

reduced below benchmark in both 2010 and 2011. The overall result indicates Council’s ongoing

commitment to their asset renewal capital works program with a marginal increase in funding

required for the benchmark to be attained in future years.

As confirmed by the $26.8m increase in the infrastructure asset base, Council has adequately

invested in capital expenditure, with the Capital Expenditure Ratio above the benchmark in each of

the three years.


3.6(c): Capital Program

The following figures are sourced from the Council’s Annual Financial Statements at Special Schedule

No. 8 and are not audited. New capital works are major non-recurrent projects.

Capital Program ($’000s) Year ended 30 June

2011 2010 2009

New capital works 7,119 18,108 11,454

Replacement/refurbishment of existing assets 16,391 6,669 8,026

Total 23,510 24,777 19,480

In each of the three years Council has utilised its capital expenditure on a variety of assets however

road, bridge and footpath infrastructure assets have seen the main focus with over $23m spent on this

category over the three years.

Of the $23.5m spent in 2011, specific spending was attributable as follows:

$6.4m related to the Glen Willow sports complex upgrade

$4.0m on sewerage assets

$2.0m on water supply assets

$4.4m on road and bridge assets

$2.8m on heavy plant asset purchases


3.7: Specific Risks to Council

Population increasing linked to mining expansion in the LGA. The four existing coal mines

within the LGA are expanding and other mines may follow that could add an additional 5,000

residents to the region in the next five years. Council are responsible for providing extra

services and negotiating with other Government departments and developers to make sure

this increased population has sufficient services and housing. Council is working with state

agencies to undertake a development service assessment, particularly focussed on the

Mudgee Township to understand the financial impacts of the anticipated growth and costs

associated with coal mining. This aims to develop strategies to address the impacts.

Low fiscal flexibility. Council relies upon successfully attracting grant funding from both the

State and Federal Government to complement their limited own source operating revenues.

As Council is reliant on this funding they have a higher risk than many Councils if the State or

Federal Government amends their funding practices or policies in future years. Council

believes that they will be able to continue to receive these levels of grants and have therefore

included this within their LTFP.

Ageing workforce. Council has stated that they expect long service leave entitlements to

increase in future years as the average workforce age continues to grow. Within Council’s

Delivery Program and Operational Plan for 2013 they have identified strategies to manage the

changing demographics of their workforce although further funding may be required in this

area as some action plans have not been allocated funding in the 2013 budget .

Environmental and natural disasters. In the last three years Council’s LGA has been declared

a natural disaster area three times due to floods and bushfires. Following the December 2010

floods Council received $4.5m in compensation against $9.5m worth of infrastructure

damage. While these events can cause financial strain, Council’s robust financial position has

ensured that they have remained financially sustainable to date.

Inability to reduce Infrastructure Backlog. Council is continuing to refine their AMP, to assess

replacement points and maintenance expenditure levels and this will provide further insight

into the long term financial sustainability of Council. Given the existing revenue raising

framework that applies, Council has stated that they are unlikely to be able to reduce the

backlog, especially when the community have stated that they would not agree to an SRV.

Council recognises further work is required in the area of asset management and long term

funding to develop strategies for addressing the backlog.

Redbank Dam legal dispute possibility. As stated within section 3.2, Council wrote-off $0.7m

of capital works in progress in relation to Redbank Dam. This was because Council do not

believe that it is their responsibility to contribute to amendment works required by the NSW

Dams Safety Commitee. Council do not accept ownership of the dam and therefore believe

they are not liable to pay for the works that are estimated to cost $2.0m. Council is pursuing

the matter of ownership with the relevant State Government Minister to confirm they do not

own the dam. If this fails Council have indicated that they will consider legal action. If this

action is followed Council will have additional legal costs and may also be liable for part or all

of the $2.0m amendment works. Council has not made any provision in relation to this issue

as they are adamant that the dam is not their responsibility.

Following a discussion with Council, the Redbank Dam dispute appears to have been

resolved with Council in agreement to fund $0.2m of the $0.8m total amendment works and

the NSW Office of Water funding the remaining $0.6m.


Section 4 Review of Financial Forecasts

The financial forecast model shows the projected financial statements and assumptions for the next 10

years. The model includes the $4.5m loan without any LIRS subsidy. $1.4m is included within the

2012 financial year and has already been expended in relation to the plant room replacements with

$3.1m to draw down in 2013 to complete the project.

The LIRS loan relates to the General Fund, therefore we have focused our financial analysis solely

upon this Fund. Council’s consolidated position includes both a Water and Sewer Fund however these

are operated as independent entities, which unlike the General Fund are more able to adjust the

appropriate fees and charges to meet all future operating and investing expenses.

There is also a separate Other Fund that specifically relates to waste management within the 2011

financial statements however this is incorporated within the General Fund for the forecast and our

analysis.

4.1: Operating Results

Council has projected a declining operating result in 2012 compared to the 2011 historical result, with

the forecast showing an improving trend over the 10 year period after 2012. The Operating Ratio is

scheduled to be above the benchmark by 2017 however it remains in deficit for all forecast years.

The forecast 2012 Operating Ratio is expected to deteriorate due to known expense increases, with

employee costs increasing by 14.1%. The employee costs have increased due to increased staff

numbers, increased overtime, increased casual staff, employee leave entitlements included that had

been discounted in 2011 and an accounting policy relating to employee costs attributable to the

remediation of impaired infrastructure that reduced costs by $0.7m in 2011.

The immediate improvement in 2013 is due to the reduction in materials and contract expenses rather

than a strong increase in revenues. In 2012 approximately $2.5m was forecast to be spent on natural

disaster repair works that was linked to grant funding received in this year. There is a further reduction

in 2014 as a specific grant initiative of $0.3m p.a. ends in 2013 and a reduction in maintenance of

$0.4m is expected from the completion of the resealing of a major road.

(12.0%)

(10.0%)

(8.0%)

(6.0%)

(4.0%)

(2.0%)

0.0%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 7- Operating Ratio for General Fund

Operating Ratio Benchmark


The years 2017 to 2019 benefit from higher forecast gains from the disposal of land assets of between

$0.6m and $0.9m and all years from 2017 benefit from increased interest and investment revenue.

4.2: Financial Management Indicators

The financial management indicators are linked to the utilisation of debt in early years and improve

over time as the amortising debt reduces and operating deficits are forecast to improve.

Liquidity Ratios

Council has forecast cash and cash equivalents to be above the benchmark for the full period with a

decrease in 2012 followed by a continuous increase over the remaining 10 years.

With the historical high levels of cash and cash equivalents it appears reasonable for Council to be

above the benchmark over the forecast period.

While Council has forecast the growth in cash and cash equivalents, current investments are forecast

to remain static. Council may be able to invest some of the unutilised funds into term deposit accounts

to maximise their financial return.

The increase in the cash and cash equivalents is forecast while there is a projected shortfall in capital

expenditure as illustrated in section 4.3.

0.0 months

2.0 months

4.0 months

6.0 months

8.0 months

10.0 months

12.0 months

14.0 months

16.0 months

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 8 - Cash Expense Ratio for General Fund

Cash Expense Ratio Benchmark


Council is forecasting a continuation of the Unrestricted Current Ratio above the benchmark. This

indicates that Council should have sound liquidity over the forecast period.

Fiscal Flexibility Ratios

Council has historically received a substantial proportion of their total revenues from grant funding and

this is illustrated in the 2011 historic result. The forecast is for the Own Source Operating Revenue

Ratio to reduce further in 2012 prior to improving from 2013 onwards to reach the benchmark in 2015

and 2016 before reducing slightly below the benchmark for the last five forecast years.

The improvement in this ratio is due to lower capital grants and contributions being forecast.

3.45x

3.00x3.20x

3.44x3.69x

3.94x 4.00x4.23x

3.87x

4.44x4.78x

5.07x

0.00x

1.00x

2.00x

3.00x

4.00x

5.00x

6.00x

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 9 - Unrestricted Current Ratio for General Fund

Benchmark

40%

45%

50%

55%

60%

65%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 10 - Own Source Operating Revenue Ratio for General Fund

Own Source Operating Revenue Ratio Benchmark


Council is forecasting a DSCR above the benchmark for each year of the forecast, with the lower

results from 2013 onwards due to the utilisation of $3.3m borrowings in 2012, including $1.4m of the

LIRS borrowings, and the remaining $3.1m in 2013. The DSCR reduces in 2020 due to a one-off

increase in the debt repayment in that year.

The Interest Cover Ratio, similarly to the DSCR, shows the Council has sufficient capacity to service

scheduled debt commitments, including the LIRS loan. There is capacity to service further debt

interest costs before the Council’s ratio decreases to the 4.00x benchmark.

16.46x

19.15x

11.95x10.89x 11.01x 11.36x

12.51x 12.72x 13.12x

8.17x

16.17x

19.86x

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 11 - DSCR for General Fund

Benchmark

69.35x

31.49x

19.35x 17.43x 18.41x 19.96x23.27x 25.08x

27.87x 29.16x

36.04x40.37x

0.00x

10.00x

20.00x

30.00x

40.00x

50.00x

60.00x

70.00x

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 12 - Interest Cover Ratio for General Fund

Benchmark


4.3: Capital Expenditure

Council has forecast that the Capital Expenditure Ratio will reduce below the benchmark in 2013 and

remain beneath for the remaining 10 years. The projected shortfall against the benchmark equates to

$26.5m over the 10 year period from 2013 onwards.

Council has forecast the purchase of IPP&E to halve in 2013 to $13.5m when compared to 2012 and

remain below $13.0m for the nine following years.

As stated within the Cash Expense Ratio, Council is expecting cash and cash equivalents to increase

over the forecast period and these funds may be able to be utilised to reduce the shortfall in capital

expenditure.

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 13 - Capital Expenditure Ratio for General Fund

Capital Expenditure Ratio Benchmark


4.4: Financial Model Assumption Review

Councils have used their own assumptions in developing their forecasts.

In order to evaluate the validity of the Council’s forecast model, TCorp has compared the model

assumptions versus TCorp’s benchmarks for annual increases in the various revenue and expenditure

items. Any material differences from these benchmarks should be explained through the LTFP.

TCorp’s benchmarks:

Rates and annual charges: TCorp notes that the LGCI increased by 3.4% in the year to

September 2011, and in December 2011, IPART announced that the rate peg to apply in the

2012/13 financial year will be 3.6%. Beyond 2013 TCorp has assessed a general benchmark

for rates and annual charges to increase by mid-range LGCI annual increases of 3.0%

Interest and investment revenue: annual return of 5.0%

All other revenue items: the estimated annual CPI increase of 2.5%

Employee costs: 3.5% (estimated CPI+1%)

All other expenses: the estimated annual CPI increase of 2.5%

Key Observations and Risks

Council’s forecast assumes current service levels are maintained across the 10 year period.

Rates and annual charges are forecast to increase by 2.8% p.a. Council do not plan to apply

for an SRV after community consultation confirmed that they were opposed to an increase to

improve service delivery.

User fees and charges are forecast to increase at levels below CPI. This equates to annual

increases of between 0.7% and 1.7% between 2014 and 2022. While this is below our 2.5%

benchmark, Council have seen a reduction over the last three years therefore this cautious

assumption is deemed reasonable.

Council believe there is a high degree of certainty in relation to the majority of their operating

grants and contributions. The general purpose financial assistance grants and RMS regional

road funding grants make up approximately two thirds of these totals and these are the two

grants that Council are most certain of.

Employee costs are forecast to increase at 3.2% p.a. for the majority of the 10 year period.

There is however a 14.1% increase in 2012 due to the known items noted in section 4.1.

There is also a 7.3% increase in 2013 as Council plans to add further staff while long service

leave costs are expected to grow as the workforce ages. Council has confirmed that there

were 289 FTE staff at 30 June 2012 with additional drainage staff employed for increased

roadside drainage maintenance and this is expected to continue to increase in future years.

Materials and contracts to increase 3.0% p.a. however to reduce by over 50% in the first four

years due to the known items noted in section 4.1.

Interest and investment revenue increases within 1% of the 5.0% benchmark until 2017 when

it increases 96% to $1.4m and remains for the following five years. This large increase is

because from 2017 onwards the forecast calculates the interest and investment revenue as a

percentage of cash and cash equivalents, and investments whereas the four previous year

figures are adopted from the operational plan/delivery program. The amounts received from

2017 equate to between 4.7% and 5.7% of the total cash and cash equivalents, and


investments therefore these increased figures are actually within a 1.0% variance from the

TCorp benchmark.

Depreciation is forecast to remain static across the 10 year period at approximately $12.8m

compared to the 2011 historic amount of $12.3m for the General Fund. At present Council

believe this calculation to be accurate but as stated in section 3.7 Council recognise that

further work in asset management is required that may impact the depreciation figure in the

future.

A forecast gain on the disposal of assets is projected in each year of between $0.1m and

$0.9m. These gains relate to specific land sales that are planned over the period. In 2013

Council has three land development projects with forecast sales.

In general the underlying assumptions within the LTFP are consistent with TCorp

assumptions, with no category forecast to increase by over 4.0% p.a. apart from in the years

where the specific amounts are known


4.5: Borrowing Capacity

When analysing the financial capacity of the Council we believe Council will be able to incorporate

additional loan funding in addition to the LIRS loan facilities. Some comments and observations are:

Based on a benchmark of DSCR>2x, $26.5m could be borrowed in addition to the $4.5m

borrowings proposed under LIRS within the General Fund in 2011/12 and 2012/13

This scenario has been calculated by basing borrowing capacity on a 10 year amortising loan,

at a rate of 8.5%

This amount is calculated on the assumption that Council continues to receive the operating

grants and contributions as historically awarded. As Council cannot completely guarantee this

revenue stream TCorp believes it would be more prudent to recommend a lower amount of

$13.3m, representing half of this $26.5m) that could be utilised to assist funding the gap

between scheduled capital expenditure and depreciation.

16.46x

19.15x

2.01x 2.13x 2.15x 2.22x 2.45x 2.48x 2.55x 2.23x 2.55x 2.67x

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 14 - DSCR for General Fund with additional $26.5m

Benchmark


Section 5 Benchmarking and Comparisons with Other Councils

As discussed in section 2 of this report, each council’s performance has been assessed against ten key

benchmark ratios. The benchmarking assessment has been conducted on a consolidated basis (that is,

for councils that operate more than one fund, the results of all funds are included). This section of the

report compares the Council’s performance with its peers in the same DLG Group. The Council is in

DLG Group 4. There are 32 councils in this group and at the time of preparing this report, we have data

for 19 of these councils.

In Figure 15 to Figure 21, the graphs compare the historical performance of Council with the benchmark

for that ratio, with the average for the Group, with the highest performance (or lowest performance in the

case of the Infrastructure Backlog Ratio where a low ratio is an indicator of strong performance), and with

the forecast position of the Council as at 2016 (as per Council’s LTFP). Figures 22 to 24 do not include

the 2016 forecast position as those numbers are not available.

Where no highest line is shown on the graph, this means that Council is the best performer in its group

for that Ratio.

Financial Flexibility

Council’s Operating Ratio was above benchmark and the group’s average in the past three years,

although the ratio has trended downwards over that period. Operating results are forecast to remain

adequate over the medium term, indicating that Council expects to contain its operating expenditure

levels.

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

2009 2010 2011 2016

Figure 15 - Operating Ratio Comparison

Benchmark Highest

Average Mid-Western Regional Council


Council’s Own Source Operating Revenue Ratio was below benchmark and the group’s average in the

past three years, indicating that Council was heavily reliant on external funding sources. The proportion

of own sourced revenue is forecast to improve over the medium term to above benchmark due to lower

forecast capital grants and contributions.

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

2009 2010 2011 2016

Figure 16 - Own Source Operating Revenue Ratio Comparison

Benchmark Highest



Liquidity

Council’s Cash Expense Ratio and Unrestricted Current Ratio were well above benchmark and the

group’s average in the past three years, and are forecast to maintain strong levels over the medium term.

Overall, Council’s liquidity position was sound over the review period, and compared favourably with the

other councils in the group.

0.0 months

2.0 months

4.0 months

6.0 months

8.0 months

10.0 months

12.0 months

14.0 months

2009 2010 2011 2016

Figure 17 - Cash Expense Ratio Comparison

Benchmark Highest


1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2009 2010 2011 2016

Figure 18 - Unrestricted Current Ratio Comparison

Benchmark Highest



Debt Servicing

Over the review period, Council’s DSCR was well above benchmark and the group’s average. Whilst this

ratio is forecast to fall over the medium term, it will remain at sound levels.

Council’s Interest Cover Ratio was the highest out of its peer group of councils. Like DSCR, this position

is forecast to decline in future years, but remain sound.

Overall, Council’s debt servicing capacity has been very strong and is forecast to remain above

benchmark over the medium term.

-

5.00

10.00

15.00

20.00

2009 2010 2011 2016

Figure 19 - Debt Service Cover Ratio Comparison

Benchmark Highest


-

5.00

10.00

15.00

20.00

25.00

30.00

2009 2010 2011 2016

Figure 20 - Interest Cover Ratio Comparison

Benchmark Highest



Asset Renewal and Capital Works

-

0.50

1.00

1.50

2.00

2.50

3.00

2009 2010 2011 2016

Figure 21 - Capital Expenditure Ratio Comparison

Benchmark Highest


-

0.20

0.40

0.60

0.80

1.00

1.20

2009 2010 2011

Figure 22 - Asset Maintenance Ratio Comparison

Benchmark Highest



Council’s Infrastructure Backlog Ratio was well above benchmark and the group’s average in the past

three years. While Council’s Asset Maintenance Ratio and Building and Infrastructure Asset Renewal

Ratio generally outperformed the group’s average over the review period, Council remained below

benchmark. This indicates that Council has not been able to invest sufficient funds to address the

infrastructure backlog.

Council’s Capital Expenditure Ratio was above benchmark and the group’s average in the past three

years, and is forecast to remain high in future years.

Overall, Council appears to be prioritising capital works over asset maintenance and renewal, making it

difficult to reduce the backlog.

-

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2009 2010 2011

Figure 23- Infrastructure Backlog Ratio Comparison

Benchmark Lowest


-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2009 2010 2011

Figure 24 - Building and Infrastructure Asset Renewal Ratio

Benchmark Highest



Section 6 Conclusion and Recommendations

Based on our review of both the historic financial information and the 10 year financial forecast within

Council’s long term financial plan we consider Council to be in a satisfactory financial position.

Council have a limited ability to increase their own source operating revenues and these have remained

at approximately 55% of Council’s consolidated total revenues over the three year historical period.

Council therefore rely upon successfully receiving grants and contributions to enhance their revenues to

meet their operating expenses and assist the completion of capital programs.

Council’s combined operating and capital grants and contributions have been approximately $20m in

each of the three years, highlighting the ability of Council to consistently apply for and receive these

sources of revenues.

TCorp is therefore recommending that Council are in an adequate financial position to utilise the

additional $4.5m borrowings in relation to the LIRS application.

We base our recommendation on the following key points:

Council’s underlying operating performance in 2011 (measured using EBITDA) has shown its

strongest performance across the past three years

Over the last three years and the 10 forecast years, Council has a strong DSCR and Interest

Cover Ratio that are considerably higher than the benchmarks

Council appears to have sufficient liquidity to manage their short term liabilities during the 10

year forecast period, a continuation of the historic trend

Council has spent sufficient capital expenditure in the last three years to increase the IPP&E

asset base

However we would also recommend that the following points be considered:

We base our recommendation that Council receive the LIRS loan on the assumption that

Council will continue to receive a similar level of grants and contributions over the forecast

period. Council rely upon these revenues, as their own source operating revenues both on a

historic consolidated basis, and a forecast General Fund basis, remain below (or at best equal

to) the 60% benchmark

Council’s Infrastructure Backlog has remained around $100m for the past three years. Council

do not appear to have the capacity to reduce this figure and may need external assistance if this

figure is to decrease over the short or medium term.

Council’s operating expenses have increased at a faster rate than revenues in the last three

years with the increase in depreciation the main contributor

Within Council’s forecast there are projected consecutive gains from the disposal of assets

relating to land and property development, an area that is not a core operating focus for

Councils which has its own set of risks and variables


Appendix A Historical Financial Information Tables

Table 1- Income Statement

Income Statement ($'000s) Year ended 30 June % annual change

2011 2010 2009 2011 2010

Revenue

Rates and annual charges 20,331 19,520 18,717 4.2% 4.3%

User charges and fees 9,678 10,783 10,357 (10.2%) 4.1%

Interest and investment revenue 1,722 1,752 2,055 (1.7%) (14.7%)

Grants and contributions for operating purposes 13,470 11,072 12,515 21.7% (11.5%)

Other revenues 1,614 1,884 1,365 (14.3%) 38.0%

Total revenue 46,815 45,011 45,009 4.0% 0.0%

Expenses

Employees 17,076 17,921 16,801 (4.7%) 6.7%

Borrowing costs 528 533 530 (0.9%) 0.6%

Materials and contract expenses 10,268 11,681 11,602 (12.1%) 0.7%

Depreciation and amortisation 15,075 10,058 9,670 49.9% 4.0%

Other expenses 4,644 5,014 4,155 (7.4%) 20.7%

Net loss from the disposal of assets 761 406 33 251.0% 1130.3%

Total expenses 48,352 45,613 42,791 9.1% 6.6%

Operating result (excluding capital grants and contributions) (1,537) (602) 2,218 393.4% (127.1%)

Operating result (including capital grants and contributions) 6,198 8,022 10,084 (40.6%) (20.4%)

Table 2 - Items excluded from Income Statement

Excluded items ($’000s)

2011 2010 2009

Grants and contributions for capital purposes 7,735 8,624 7,866

Impairment – flood damaged infrastructure 769 0 0

Net loss from the disposal of asset – Redbank Dam 644 0 0


Table 3 - Balance Sheet

Balance Sheet ($’000s) Year Ended 30 June % annual change

2011 2010 2009 2011 2010

Current assets

Cash and equivalents 25,354 30,030 33,259 (15.6%) (9.7%)

Investments 1,000 1,000 2,950 0.0% (66.1%)

Receivables 6,073 4,433 3,189 37.0% 39.0%

Inventories 2,866 1,263 615 126.9% 105.4%

Other 13 0 2 N/A (100.0%)

Non-current assets classified as 'held for sale' 0 1,288 50 (100.0%) 2476.0%

Total current assets 35,306 38,014 40,065 (7.1%) (5.1%)

Non-current assets

Investments 2,331 2,268 2,195 2.8% 3.3%

Inventories 254 1,547 869 (83.6%) 78.0%

Infrastructure, property, plant & equipment 520,964 511,861 335,209 1.8% 52.7%

Intangible assets 438 321 221 36.4% 45.2%

Total non-current assets 523,987 515,997 338,494 1.5% 52.4%

Total assets 559,293 554,011 378,559 1.0% 46.3%

Current liabilities

Payables 5,144 5,168 4,318 (0.5%) 19.7%

Borrowings 550 577 509 (4.7%) 13.4%

Provisions 4,596 4,855 4,715 (5.3%) 3.0%

Total current liabilities 10,290 10,600 9,542 (2.9%) 11.1%

Non-current liabilities

Borrowings 6,732 7,216 6,832 (6.7%) 5.6%

Provisions 1,070 1,053 1,180 1.6% (10.8%)

Total non-current liabilities 7,802 8,269 8,012 (5.6%) 3.2%

Total liabilities 18,092 18,869 17,554 (4.1%) 7.5%

Net assets 541,201 535,142 361,005 1.1% 48.2%


Table 4-Cashflow

Cashflow Statement ($'000s) Year ended 30 June

2011 2010 2009

Cashflows from operating activities 21,797 16,986 21,425

Cashflows from investing activities (25,962) (20,667) (14,617)

Proceeds from borrowings and advances 0 1,000 0

Repayment of borrowings and advances (511) (548) (483)

Cashflows from financing activities (511) 452 (483)

Net increase/(decrease) in cash and equivalents (4,676) (3,229) 6,325

Cash and equivalents 25,354 30,030 33,259


Appendix B Glossary

Asset Revaluations

In assessing the financial sustainability of NSW councils, IPART found that not all councils reported

assets at fair value.1 In a circular to all councils in March 20092, DLG required all NSW councils to

revalue their infrastructure assets to recognise the fair value of these assets by the end of the 2009/10

financial year.

Collateralised Debt Obligation (CDO)

CDOs are structured financial securities that banks use to repackage individual loans into a product that

can be sold to investors on the secondary market.

In 2007 concerns were heightened in relation to the decline in the “sub-prime” mortgage market in the

USA and possible exposure of some NSW councils, holding CDOs and other structured investment

products, to losses.

In order to clarify the exposure of NSW councils to any losses, a review was conducted by the DLG with

representatives from the Department of Premier and Cabinet and NSW Treasury.

A revised Ministerial investment Order was released by the DLG on 18 August 2008 in response to the

review, suspending investments in CDOs, with transitional provisions to provide for existing investments.

Division of Local Government (DLG)

DLG is a division of the NSW Department of Premier and Cabinet and is responsible for local

government across NSW. DLG’s organisational purpose is “to strengthen the local government sector”

and its organisational outcome is “successful councils engaging and supporting their communities”.

Operating within several strategic objectives DLG has a policy, legislative, investigative and program

focus in matters ranging from local government finance, infrastructure, governance, performance,

collaboration and community engagement. DLG strives to work collaboratively with the local government

sector and is the key adviser to the NSW Government on local government matters.

Depreciation of Infrastructure Assets

Linked to the asset revaluations process stated above, IPART’s analysis of case study councils found

that this revaluation process resulted in sharp increases in the value of some council’s assets. In some

cases this has led to significantly higher depreciation charges, and will contribute to higher reported

operating deficits.

EBITDA

1IPART “Revenue Framework for Local Government” December 2009 p.83

2 DLG “Recognition of certain assets at fair value” March 2009

http://useconomy.about.com/od/glossary/g/Banking.htm


EBITDA is an acronym for “earnings before interest, taxes, depreciation, and amortisation”. It is often

used to measure the cash earnings that can be used to pay interest and repay principal.

Grants and Contributions for Capital Purposes

Councils receive various capital grants and contributions that are nearly always 100% specific in nature.

Due to the fact that they are specifically allocated in respect of capital expenditure they are excluded from

the operational result for a council in TCorp’s analysis of a council’s financial position.

Grants and Contributions for Operating Purposes

General purpose grants are distributed through the NSW Local Government Grants Commission. When

distributing the general component each council receives a minimum amount, which would be the

amount if 30% of all funds were allocated on a per capita basis. When distributing the other 70%, the

Grants Commission attempts to assess the extent of relative disadvantage between councils. The

approach taken considers cost disadvantage in the provision of services on the one hand and an

assessment of revenue raising capacity on the other.

Councils also receive specific operating grants for one-off specific projects that are distributed to be spent

directly on the project that the funding was allocated to.

Independent Commission Against Corruption (ICAC)

ICAC was established by the NSW Government in 1989 in response to growing community concern

about the integrity of public administration in NSW.

The jurisdiction of the ICAC extends to all NSW public sector agencies (except the NSW Police Force)

and employees, including government departments, local councils, members of Parliament, ministers,

the judiciary and the governor. The ICAC's jurisdiction also extends to those performing public official

functions.

Independent Pricing and Regulatory Tribunal (IPART)

IPART has four main functions relating to the 152 local councils in NSW. Each year, IPART determines

the rate peg, or the allowable annual increase in general income for councils. They also review and

determine council applications for increases in general income above the rate peg, known as “Special

Rate Variations”. They approve increases in council minimum rates. They also review council

development contributions plans that propose contribution levels that exceed caps set by the

Government.

Infrastructure Backlog

Infrastructure backlog is defined as the estimated cost to bring building, infrastructure and other

structures to a satisfactory standard, measured at a particular point in time. It is unaudited and stated

within Special Schedule 7 that accompanies the council’s audited annual financial statements.

Integrated Planning and Reporting (IP&R) Framework

http://en.wikipedia.org/wiki/Acronym

http://en.wikipedia.org/wiki/Profit_(accounting)

http://en.wikipedia.org/wiki/Interest

http://en.wikipedia.org/wiki/Taxes

http://en.wikipedia.org/wiki/Depreciation

http://en.wikipedia.org/wiki/Amortization_(tax_law)


As part of the NSW Government’s commitment to a strong and sustainable local government system, the

Local Government Amendment (Planning and Reporting) Act 2009 was assented on 1 October 2009.

From this legislative reform the IP&R framework was devised to replace the former Management Plan

and Social Plan with an integrated framework. It also includes a new requirement to prepare a long-term

Community Strategic Plan and Resourcing Strategy. The other essential elements of the new framework

are a Long-Term Financial Plan (LTFP), Operational Plan and Delivery Program and an Asset

Management Plan.

Local Government Cost Index (LGCI)

The LGCI is a measure of movements in the unit costs incurred by NSW councils for ordinary council

activities funded from general rate revenue. The LGCI is designed to measure how much the price of a

fixed “basket” of inputs acquired by councils in a given period compares with the price of the same set of

inputs in the base period. The LGCI is measured by IPART.

Net Assets

Net Assets is measured as total assets less total liabilities. The Asset Revaluations over the past years

have resulted in a high level of volatility in many councils’ Net Assets figure. Consequently, in the short

term the value of Net Assets is not necessarily an informative indicator of performance. In the medium to

long term however, this is a key indicator of a council’s capacity to add value to its operations. Over time,

Net Assets should increase at least in line with inflation plus an allowance for increased population and/or

improved or increased services. Declining Net Assets is a key indicator of the council’s assets not being

able to sustain ongoing operations.

Roads and Maritime Services (RMS)

The NSW State Government agency with responsibility for roads and maritime services, formerly the

Roads and Traffic Authority (RTA).

Section 64 Contribution

Development Servicing Plans (DSPs) are made under the provisions of Section 64 of the Local

Government Act 1993 and Sections 305 to 307 of the Water Management Act 2000.

DSPs outline the developer charges applicable to developments for Water, Sewer and Stormwater

within each Local Government Area.

Section 94 Contribution

Section 94 of the Environmental Planning and Assessment Act 1979 allows councils to collect

contributions from the development of land in order to help meet the additional demand for community

and open space facilities generated by that development.

It is a monetary contribution levied on developers at the development application stage to help pay for

additional community facilities and/or infrastructure such as provision of libraries; community facilities;

open space; roads; drainage; and the provision of car parking in commercial areas.


The contribution is determined based on a formula which should be contained in each council's

Section 94 Contribution Plan, which also identifies the basis for levying the contributions and the works

to be undertaken with the funds raised.

Special Rate Variation (SRV)

A SRV allows councils to increase general income above the rate peg, under the provisions of the Local

Government Act 1993. There are two types of special rate variations that a council may apply for:

a single year variation (section 508(2)) or

a multi-year variation for between two to seven years (section 508A).

The applications are reviewed and approved by IPART.


Ratio Explanations

Asset Maintenance Ratio

Benchmark = Greater than 1.0x

Ratio = actual asset maintenance / required asset maintenance

This ratio compares actual versus required annual asset maintenance, as detailed in Special Schedule 7.

A ratio of above 1.0x indicates that the council is investing enough funds within the year to stop the

infrastructure backlog from growing.

Building and Infrastructure Renewals Ratio


Ratio = Asset renewals / depreciation of building and infrastructure assets

This ratio compares the proportion spent on infrastructure asset renewals and the asset’s deterioration

measured by its accounting depreciation. Asset renewal represents the replacement or refurbishment of

existing assets to an equivalent capacity or performance as opposed to the acquisition of new assets or

the refurbishment of old assets that increase capacity or performance.

Cash Expense Cover Ratio

Benchmark = Greater than 3.0 months

Ratio = current year’s cash and cash equivalents / total expenses – depreciation – interest costs

This liquidity ratio indicates the number of months a council can continue paying for its immediate

expenses without additional cash inflow.

Capital Expenditure Ratio


Ratio = annual capital expenditure / annual depreciation

This indicates the extent to which a council is forecasting to expand its asset base with capital

expenditure spent on both new assets, and replacement and renewal of existing assets.

Debt Service Cover Ratio (DSCR)


Ratio = operating results before interest and depreciation (EBITDA) / principal repayments (from the

statement of cash flows) + borrowing interest costs (from the income statement)

This ratio measures the availability of cash to service debt including interest, principal and lease

payments


Infrastructure Backlog Ratio

Benchmark = Less than 0.02x

Ratio = estimated cost to bring assets to a satisfactory condition (from Special Schedule 7) / total

infrastructure assets (from Special Schedule 7)

This ratio shows what proportion the backlog is against total value of a council’s infrastructure.

Interest Cover Ratio


Ratio = EBITDA / interest expense (from the income statement)

This ratio indicates the extent to which a council can service its interest bearing debt and take on

additional borrowings. It measures the burden of the current interest expense upon a council’s operating

cash.

Operating Ratio

Benchmark = Better than negative 4%

Ratio = (operating revenue excluding capital grants and contributions – operating expenses) / operating

revenue excluding capital grants and contributions

This ratio measures a council’s ability to contain operating expenditure within operating revenue.

Own Source Operating Revenue Ratio

Benchmark = Greater than 60%

Ratio = rates, utilities and charges / total operating revenue (inclusive of capital grants and contributions)

This ratio measures the level of a council’s fiscal flexibility. It is the degree of reliance on external funding

sources such as operating grants and contributions. A council’s financial flexibility improves the higher the

level of its own source revenue.

Unrestricted Current Ratio

Benchmark = 1.5x (taken from the IPART December 2009 Revenue Framework for Local Government

report)

Ratio = Current assets less all external restrictions / current liabilities less specific purpose liabilities

Restrictions placed on various funding sources (e.g. Section 94 developer contributions, RMS

contributions) complicate the traditional current ratio because cash allocated to specific projects are

restricted and cannot be used to meet a council’s other operating and borrowing costs. The Unrestricted

Current Ratio is specific to local government and is designed to represent a council’s ability to meet debt

payments as they fall due.

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