It’s been a decade since formal inquiries were conducted assessing the financial sustainability of local government sectors in all Australian states. Since then much has changed. There have been legislative reforms, guidelines and training aimed at improving financial performance. Councils rightly now focus much more on the longer-term than they once did.
Local governments have more discretion as regards to the range and level of services they provide than is often recognised. Ratepayers and service recipients need to understand the costs and revenue-raising implications of the services they want their councils to provide. Assets need to be provided, maintained and renewed on a basis that is cost-effective and consistent with preferences and long-run affordability.
Realistic rather than aspirational
First and foremost councils need to develop asset management and financial plans that are consistent with each other. Asset management plans need to be realistic rather than aspirational. Financial plans need to aim to ensure ongoing underlying operating revenue is sufficient to offset ongoing underlying operating revenue. If the above objectives can be achieved then it should be possible to address asset renewal and replacement and accommodate the need for provision of new assets as and when required. Achievement may though require increases in the revenue base and reductions in service levels and costs.
Many councils have a healthy operating position but often perceive they don’t have the capacity to accommodate capital expenditure needs. Typically this is because they are reluctant to make the extent of use of debt that is appropriate for their operating circumstances and responsibilities. In fact they are discouraged from doing so. Even when councils do borrow they often structure repayment arrangements in ways that are not conducive to minimising costs and interest rate risk exposures.
It’s time too to tweak and in some cases change the financial indicators and targets applied by councils against which the success of their financial strategies are judged. Currently applied metrics are often inappropriate. For example given the long-lived nature of local government assets, renewal needs can be lumpy over time. Comparing asset renewal expenditure with depreciation for a period is a poor indicator of asset management performance. There can be periods of many years where councils could and should appropriately be spending much less or much more on asset renewal than recorded annual depreciation.
A sound financial strategy is dependent on reliable data. Many councils still have more work to do to improve the accuracy and usefulness of asset related accounting information. Recorded asset useful lives and residual values need for example to have regard to each council’s circumstances and practices rather than standard text book assumptions.
Most councils have significantly improved their financial focus and outcomes over the past decade but there is still more that can be done to secure their financial future and improve the cost-effective value provided to ratepayers.
John Comrie will be speaking on ‘How to achieve financial sustainability’ at the Local Government Financial Sustainability conference this September. Book your place by July 29th to save $400 on ticket prices.