Bogan Shire Council Financial Assessment, … · Financial Assessment, Sustainability and...

Bogan Shire Council

Bogan Shire Council

Financial Assessment, Sustainability and Benchmarking Report

12 March 2013

Prepared by NSW Treasury Corporation for Bogan Shire Council, the Division of Local

Government and the Independent Local Government Review Panel.

Bogan Shire Council

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 to assist the DLG and the

Independent Local Government Review Panel in its consideration of the Sustainability of each local

government area in NSW.

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, and Council’s future Sustainability, within prudent risk parameters and

the limits of its financial projections.

The report has been prepared for Bogan Shire Council, the DLG and the Independent Local

Government Review Panel. TCorp shall not be liable to Bogan Shire 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.

Bogan Shire Council

Index

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

Section 2 Introduction ................................................................................................................... 7

2.1: Purpose of Report ........................................................................................................... 7

2.2: Scope and Methodology ................................................................................................. 7

2.3: Overview of the Local Government Area ........................................................................ 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 .................................................................................... 18

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

4.2: Financial Management Indicators ................................................................................. 20

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

4.4: Financial Model Assumption Review ............................................................................. 24

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

4.6: Sustainability ................................................................................................................. 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

Bogan Shire Council

Section 1 Executive Summary

This report provides an independent assessment of Bogan Shire Council’s (the Council) financial

capacity, and its future Sustainability. 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.

TCorp’s approach has been to:

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

Conduct a detailed review of the Council’s 10 year financial forecasts, with a particular focus

on a council’s General Fund. Where a council operates a Water or other Fund the financial

capacity of these other Funds may be reviewed where considered necessary.

The Council’s financial results have been satisfactory over the review period based on the following

observations:

Council’s underlying annual operating results (measured using EBITDA) increased by $2.7m

over the review period to $4.2m

Council’s Unrestricted Current Ratio has been above the benchmark in each of the four years

indicating Council had sufficient liquidity

Over the review period, Council had a low level of borrowings ($27.0k in 2012 being less than

0.1% of Net Assets). With a positive EBITDA and acceptable liquidity, Council had flexibility in

regard to taking on debt if required

The Council reported $6.0m of Infrastructure Backlog in 2012 which represents 7.6% of its

infrastructure asset value of $79.4m. Other observations include:

Over the past four years, the value of the Infrastructure Backlog, as indicated in Special

Schedule 7, has remained static due to non- updated data, amounting to $6.0m in 2012.

Following the development of Asset Management Plans (AMP), the backlog has been

reviewed and its value was estimated at $2.3m. The existing backlog is mainly related to

public roads (approximately 84.0% of the total value of the backlog). Council officers have

indicated that this information aligns with Council’s AMP.

Based on the data provided in Special Schedule 7, it appears that spending on maintenance

of assets was sufficient only in two of the past four years (2009 and 2011). In the short to

medium term, if Council does not spend the required amounts on maintenance of assets, it is

likely that the backlog will grow.

The AMP for roads have highlighted that, based on the current funding levels, Council is likely

to incur a funding shortfall of $0.3m p.a. over the next ten years, which is 9.0% of the cost to

provide the required service levels

Bogan Shire Council

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

The current LTFP needs further development as many of the assumptions are generic straight

line assumptions that are not consistent with past trends and need to be enhanced to more

accurately reflect Council’s forecast position

The LTFP assumes that service levels to the community remain unchanged, although with a

declining population this appears inconsistent

The forecasts show consistent operating deficits excluding capital grants and contributions in

all 10 years

Council’s level of fiscal flexibility will continue to be limited as Council will continue to rely on

external funding sources such as operating grants and contributions

Overall it appears that Council will have sufficient liquidity throughout the next 10 year period

to service all short term liabilities and currently scheduled capital expenditure

The total capital expenditure is forecast to meet the required levels and Council’s asset base

is expected to marginally expand over time

In our view, based on its credit metrics of DSCR and Interest Cover Ratio, the Council has the capacity

to undertake additional borrowings. However, the forecasts show consistent operating deficits between

2013 and 2022. TCorp considers that it would be prudent for Council to develop strategies to improve

its operating position prior to undertaking any borrowings.

TCorp believes Council to be moderately sustainable in the short to medium term. An accurate

assessment of Council’s longer term Sustainability will need to be undertaken once a review of the

LTFP has been undertaken. Council has recorded operating deficits when capital grants and

contributions are excluded in three of the past four years. In addition, over the past four years, Council

did not spend the required amounts on asset renewals. The AMP has highlighted the insufficiency of

the resources available in relation to the funding of roads particularly.

In respect of the long term Sustainability of the Council our key observations are:

The assumptions underpinning the current LTFP need to be reviewed so that more definitive

conclusions can be drawn about Council’s Sustainability

Council forecasts continuous operating deficits (excluding capital grants and contributions)

that will make it difficult to maintain service levels and to service further borrowings

Council’s long term Sustainability would be aided by a diversification of its revenue sources in

order to decrease its reliance on operating grants and contributions. This might be difficult to

achieve due to the Council’s limited rating base and declining population

Council is not spending sufficient amounts on renewal of assets and in the long term this is

likely to lead to a deteriorating asset base

Council has further borrowing capacity to fund its capital projects in the longer term but needs

to first address its ongoing operating deficits forecast for its General Fund

In respect of our Benchmarking analysis we have compared the Council’s key ratios with other councils

in DLG Group 9. Our key observations are:

Council’s financial flexibility is mixed with an above benchmark and average Operating Ratio

but a below benchmark and average Own Source Revenue Ratio.

Bogan Shire Council

Council’s liquidity position has been sound but was below the group average. This situation is

forecast to remain unchanged over the medium term

Council’s debt servicing capacity has been sound, though, on average, it was below the peer

group. In the medium term, Council’s debt servicing capacity is forecast to remain sound and

outperform the group average.

Council outperformed the peer group in terms of level of Infrastructure Backlog. Council’s

spending on maintenance of assets was on par with its peers. Council’s performance in

terms of building and infrastructure renewal was weak against the benchmark and the group

average.

Council’s performance in terms of capital expenditure was mixed compared to the benchmark

and the Group average. In the medium term, Council’s Capital Expenditure Ratio is forecast

to decline and be below the benchmark and above the group average.

Bogan Shire Council

Section 2 Introduction

2.1: Purpose of Report

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

Sustainability and performance measured against a peer group of councils. It will complement their

internal due diligence, and the IP&R system of the Council and the DLG, together with the work being

undertaken by the Independent Local Government Review Panel.

The report is to be provided to the DLG and the Independent Local Government Review Panel.

The key areas focused on are:

The financial capacity of the Council

The long term Sustainability of the Council

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 four 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 Council’s General Fund

Identify significant changes to future financial forecasts from existing financial performance

and highlight risks associated with such forecasts, including those that could impact Council’s

Sustainability

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 and achieve long term

Sustainability

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

the Council’s financial capacity, performance and Sustainability

In undertaking its work, TCorp relied on:

Council’s audited financial statements (2008/09 to 2011/12)

Council’s financial forecast model

Council’s IP&R documents

Discussions with Council officers

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

Bogan Shire Council

In completing the report, TCorp worked closely with Council management to analyse and understand

the information gathered. The Council was given a draft copy of the report for their review and

comment. Based on our discussions with Council:

Council agrees with the findings of the report but required further details in relation to the

rating scale used by TCorp.

Council provided us clarifying information (in relation to the AMP in particular) that we included

in the report

Definition of Sustainability

In conducting our reviews, TCorp has relied upon the following definition of sustainability to provide

guidance:

"A local government will be financially sustainable over the long term when it is able to generate

sufficient funds to provide the levels of service and infrastructure agreed with its community."

Benchmark Ratios

In conducting our review of the Councils’ financial performance, forecasts and Sustainability 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 > 1.50x

Own Source Operating Revenue Ratio > 60.0%

Debt Service Cover Ratio (DSCR) > 2.00x

Interest Cover Ratio > 4.00x

Building and Infrastructure Backlog Ratio < 0.02x

Asset Maintenance Ratio > 1.00x

Building and Infrastructure Asset Renewal Ratio > 1.00x

Capital Expenditure Ratio > 1.10x

Bogan Shire Council

2.3: Overview of the Local Government Area

Bogan Shire Council LGA

Locality & Size

Locality North West

Area 14,610km2

DLG Group 9

Demographics

Population as at 2011 2,900

% under 18 29.4%

% between 18 and 59 46.9%

% over 60 23.7%

Expected population 2031 2,477

Operations

Number of employees (FTE) 50

Annual revenue $12.7m

Infrastructure

Roads 1,406.7km

Bridges 46

Infrastructure backlog value $6.0m

Total infrastructure value $79.4m

Bogan Shire Council Local Government Area (LGA) is located in Western New South Wales, in the

Orana region. The Shire is located adjacent to the Mitchell and Barrier highways. Nyngan is the

Administrative Centre.

The main industries include agricultural production, grazing of sheep and cattle, and cropping (mainly

wheat).

In future years, the population is projected to decrease significantly while the percentage of people

aged 65 or over is forecast to grow substantially.

Bogan Shire Council

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

Rates and annual charges increased by 5.5% ($0.2m) in 2010, 5.9% ($0.2m) in 2011, and

8.3% ($0.3m) in 2012 to $3.6m. Between 2009 and 2011, farmland rates and domestic waste

management charges both increased by $0.1m to $1.4m and $0.3m respectively. In 2012,

domestic waste management charges increased by $0.1m and water supply charges

increased by $0.2m, amounting to $0.4m each.

Water supply and sewerage charges were increased following the implementation of a

Strategic Business Plan in order to generate funds over time for the replacement of ageing

infrastructure. Since 2009, the sewerage business has generated operating surpluses ($0.1m

in 2012) while the water business has generated operating deficits that have decreased over

the past four years ($0.2m deficit in 2012). In addition, a waste management levy has been

instituted to cover the construction cost of a new landfill site. All these increases have been

accepted following community consultation.

User charges and fees increased by 29.2% ($1.3m) over the review period to $2.3m. They

remained static between 2009 and 2010. They increased by 38.3% ($0.4m) in 2011 and

65.5% ($0.9m) in 2012 due to increases in RMS charges for State roads not controlled by

Council which rose by $0.3m in 2011 and $1.1m in 2012 to $1.5m.

3,561 3,289 3,107 2,944

2,3171,400

1,012 1,011

331

365329 362

6,272

5,6145,187 5,218

265

263

187 163

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2012 2011 2010 2009

Figure 1 - Revenue Sources for 2008/09 to 2011/12 ($'000s)

Rates and annual charges User charges and fees

Interest and investment revenue Grants and contributions for operating purposes

Other revenues

Bogan Shire Council

Operating grants and contributions increased by 20.2% ($1.1m) over the review period to

$6.3m. They remained relatively static between 2009 and 2010. In 2011, they increased by

8.2% ($0.4m) to $5.6m mainly due to increases of $0.2m in Financial Assistance Grants

(FAG) and in Roads to Recovery grants. In 2012, operating grants and contributions

increased by 11.7% ($0.7m) mainly due to the prepayment of half of the 2013 FAG.

Other revenue remained relatively static over the review period. In 2012, it amounted to

$0.3m and rental income was the main contributor, contributing $0.1m.

3.2: Expenses

Key Observations

While the number of equivalent full time employees decreased from 58 to 50 between 2009

and 2012, employee costs increased by 12.9% ($0.5m) to $4.4m. Over the review period,

salaries and wages increased by $0.7m to $3.3m while employee leave entitlements

increased by $0.1m to $0.6m. Council officers have indicated that the main contributors to

those increases were the use of casual employees on major road projects, the application of

local government award increases to salaries, increased payments to contract staff and

introduction of a new salary system for certain positions.

Materials and contracts costs decreased by 15.0% ($0.5m) over the review period to $2.9m

due to Council prioritising capital works in recent years.

Due to the Asset Revaluations process, annual depreciation expense increased by 65.6% in

2011 and 6.4% in 2012 to $3.4m.

In 2011, the value of annual depreciation as indicated in the 2011 financial statements, was

estimated at $8.0m following the Revaluation of roads, bridges, footpaths and stormwater

4,407 3,873 3,806 3,905

2157 91 125

2,8832,814 3,168 3,391

3,3863,183 1,922

1,875

1,2911,342

1,108 928

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2012 2011 2010 2009

Figure 2 - Expenses for 2008/09 to 2011/12 ($'000s)

Employees Borrowing costs Materials and contract expenses

Depreciation and amortisation Other expenses

Bogan Shire Council

drainage assets. In 2012, it has been highlighted that the valuation at fair value of Council’s

infrastructure assets completed in previous years was using incorrect unit values particularly

in valuing the replacement costs of roads and drains, especially rural roads. In 2012, the

value of the 2011 annual depreciation expense was reviewed and reduced from $8.0m to

$3.2m.

Other expenses increased by $0.4m over the review period to $1.3m. Insurance, and

electricity and heating costs were the main contributors to other expenses in 2012, amounting

to $0.4m and $0.2m respectively.

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 have 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

Over the review period, Council consistently reported operating deficits excluding capital

grants and contributions, with the exception of 2012. In 2012, Council’s operating results

758

(338) (273)(526)

1,685

2,609

518

(388)

(1,000)

(500)

0

500

1,000

1,500

2,000

2,500

3,000

2012 2011 2010 2009

Figure 3 - Operating Results for 2008/09 to 2011/12 ($'000s)

Operating result (excluding capital grants and contributions)

Operating result (including capital grants and contributions)

Bogan Shire Council

were boosted by substantial increases in user charges and fees ($0.9m increase) and the

prepayment of part of the 2013 FAG ($0.4m).

Council expenses include a non-cash depreciation expense ($3.4m in 2012), which has

increased over the past four 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 at it represents the allocation of the value of an

asset over its useful life.

In 2011, Council reported an operating surplus including capital grants and contributions

amounting to $2.6m due to the receipt of a $1.8m capital contribution for transport related to

other roads and bridges and following an increase in capital grant for roads and bridges which

amounted to $1.2m.

3.4: Financial Management Indicators

Performance Indicators Year ended 30 June

2012 2011 2010 2009

EBITDA ($’000s) 4,165 2,902 1,740 1,474

Operating Ratio 5.9% (3.1%) (2.8%) (5.4%)

Interest Cover Ratio 198.33x 50.91x 19.12x 11.79x

Debt Service Cover Ratio 11.11x 5.98x 3.31x 2.52x

Unrestricted Current Ratio 6.78x 2.73x 3.35x 3.41x

Own Source Operating Revenue Ratio 43.0% 33.8% 38.8% 40.2%

Cash Expense Ratio 5.9 months

5.3 months

3.6 months

5.7 months

Net assets ($'000s) 230,486 225,325 369,575 159,763

Key Observations

Council’s EBITDA increased by $2.7m between 2009 and 2012 to $4.2m mainly due to the

prepayment of FAG. The Operating Ratio has been above the benchmark since 2010.

The Unrestricted Current Ratio has been above the benchmark of 1.50x over the past four

years indicating Council had sufficient liquidity to meet its short term liabilities.

The Cash Expense Ratio was consistently above the benchmark of three months, indicating

that Council had sufficient liquidity.

Council’s Interest Cover Ratio and DSCR indicate that Council had some capacity to carry

more debt. The DSCR has been above the benchmark of 2.00x over the past four years.

Over the review period, Council did not add any new borrowings. In 2012, Council completed

the full reimbursement of the Yarrandale Road works loan ($0.3m) and had a low level of

borrowings remaining ($27.0k being less than 0.1% of Net Assets).

The Own Source Operating Revenue Ratio was consistently below the benchmark of 60.0%

over the review period, indicating Council had limited financial flexibility. Council was

consistently relying on external funding sources such as operating grants and contributions.

Net Assets increased by $70.7m between 2009 and 2012 due to the Asset Revaluations

process that increased the value of roads, bridges, footpaths, and drainage assets, and

reduced the value of community land assets.

Bogan Shire Council

The Asset Revaluations over the last four years have resulted in a high level of volatility in Net

Assets over this period. 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.

When the Asset Revaluations are excluded, the underlying trend in all four years has been an

expanding infrastructure, property, plant, and equipment (IPP&E) asset base with asset

purchases being marginally larger than the combined value of disposed assets and annual

depreciation. Over the four years, this amounted to a $2.3m increase in IPP&E assets. This

estimate takes into account the corrected depreciation expense in 2011 ($3.2m) as indicated

in the 2012 annual financial statements.

3.5: Statement of Cashflows

Key Observations

While cash and cash equivalents increased by $0.3m over the review period to $4.2m, total

cash and investments increased by $1.1m to $6.0m.

In 2012, Council had cash and investments amounting to $6.0m (including $4.2m in cash and

$1.8m in long term deposits) of which $2.3m was externally restricted, $2.3m was internally

restricted, and $1.4m was unrestricted.

Over the review period, Council did not have any CDO’s or any other forms of investment

securities.

4,1923,572

2,435

3,940

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2012 2011 2010 2009

Figure 4 - Cash and Cash Equivalents for 2008/09 to 2011/12 ($'000s)

Bogan Shire Council

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

Based on the data provided in Special Schedule 7, the value of the Infrastructure Backlog has

remained static between 2009 and 2012 as the value reported in the document has not been updated

in recent years. In 2012, Council reported a backlog of $6.0m of which 74.0% was related to public

roads.

Through the development of the Asset Management Plans (AMP), Council has carried out a detailed

review of its backlog. It has resulted in a decline in the estimated cost to bring assets up to satisfactory

conditions. Overall, it has resulted in a decline in the total value of the backlog from $6.0m in 2012 as

reported in Special Schedule 7 to $2.3m. In particular, asset condition assessments have resulted in a

19%

74%

6% 1%0%

Figure 6 - Infrastructure Backlog Composition for 2011/12

Buildings and other structures

Public roads (inc. footpaths and car

parks)

Water

Sewerage

Drainage works

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Buildings and other

structures

Public roads (inc.

footpaths and car parks)

Water Sewerage Drainage works

Figure 5 - Infrastructure Backlog for 2008/09 to 2011/12($'000s)

2012 2011 2010 2009

Bogan Shire Council

decrease of $2.5m in the value of the Backlog related to public roads, which is the main component of

the Infrastructure Backlog (84.0% of the total backlog).

The AMP has also highlighted a potential funding shortfall of $0.3m p.a. over the next 10 years in

relation to roads which corresponds to approximately 9.0% of the forecast needs. The AMP indicates

that the current funding levels are insufficient to ensure that the highest service levels are provided in

the medium term. It appears that Council will have to cease new capital acquisition in the form of new

road construction and sealing in favour of capital renewal, particularly as population is forecast to

decline. In addition, the AMP mention that some works and services cannot be fully provided under

present funding levels, including resurfacing of rural roads, Town St Bitumen, and road signs. The

actions recommended include community consultation on service delivery and funding issues, seeking

additional funding for resurfacing rural roads and improvement of the asset information and knowledge.

Regarding water and sewer assets, the AMP shows that sufficient reserve funds can be generated for

the replacement of ageing assets.

3.6(b): Infrastructure Status

Infrastructure Status Year ended 30 June

2012 2011 2010 2009

Bring to satisfactory standard ($’000s) 6,004 6,004 6,004 5,732

Required annual maintenance ($’000s) 3,572 3,572 3,572 3,540

Actual annual maintenance ($’000s) 3,411 3,881 3,342 3,546

Total value of infrastructure assets ($’000s) 79,384 75,775 356,489 147,788

Total assets ($’000s) 232,106 227,480 371,895 162,473

Building and Infrastructure Backlog Ratio 0.08x 0.08x 0.02x 0.04x

Asset Maintenance Ratio 0.95x 1.09x 0.94x 1.00x

Building and Infrastructure Renewals Ratio 0.67x 0.42x 0.40x 0.32x

Capital Expenditure Ratio 1.13x 1.87x 0.73x 0.80x

The Building and Infrastructure Backlog Ratio was consistently above the benchmark of 0.02x

with the exception of 2010 where it was at benchmark. The ratio has increased since 2011

due to the decrease in the value of the infrastructure assets following the Asset Revaluations

while the value of the backlog has remained static.

The Asset Maintenance Ratio was consistently below the benchmark of 1.00x, with the

exception of 2009 and 2011 where spending on maintenance of assets has been sufficient.

The amounts spent on maintenance of assets are provided by the Special Schedule 7 which

has not been updated in recent years. In particular, the costs of required maintenance were

not updated with the findings from the AMP.

Bogan Shire Council

The Building and Infrastructure Renewals Ratio was consistently well below the benchmark of

1.00x, indicating spending on asset renewals has not been sufficient.

Since 2011, the Capital Expenditure Ratio has been above the benchmark of 1.10x indicating

spending on additional assets has been sufficient. The ratio was particularly high in 2011 due

to the construction of Yarradale Road, a new bitumen road of 23 kilometres.

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

2012 2011 2010 2009

New capital works 2,168 N/A 217 700

Replacement/refurbishment of existing assets 1,859 N/A 655 1,874

Total 4,027 N/A 872 2,574

In recent years, Council completed several capital works including:

Improvements of the water storage levels in Burrendong Dam in order to provide medium

term security for water supply in Nyangan

Construction the of 23- kilometre section of Yarrandale Road, completing the link between

Girilambone and Hermidale

Construction of a further three kilometres of the Hermidale Nymagee Road as part of a

program of providing a sealed road link between the Barrier Highway and Kidman Way

Upgrades of the Rotary Park and Davidson Park

Completion of a new office building that incorporates the new Council Chambers

Bogan Shire Council

3.7: Specific Risks to Council

Infrastructure maintenance and asset renewal. Community expectations in terms of quality of

assets are high. Council’s infrastructure is ageing and needs maintenance and renewal.

Since 2009, Council has not been spending the required amounts on renewal of building and

infrastructure assets. Based on the current funding resources and the AMP, it appears that

Council is likely to experience a funding shortfall in future years. If this issue is not addressed,

then the asset quality is likely to deteriorate in the short to medium term.

Attraction and retention of skilled staff. Council has difficulties attracting and retaining skilled

and experienced staff. Council needs to implement active and effective recruitment strategies

to deal with this challenge.

Demographic changes. The LGA’s population has been decreasing in size over the past

years and it appears that this trend will continue in future years. In the meantime, youth and

working age populations are projected to decline while the proportion of the elderly population

is forecast to grow substantially. This will have an impact on demand for services, facilities

and infrastructure. The Local Government and Shires Associations have produced a report

“Planning the Local Government Response to Ageing and Place” which intends to offer a

framework to assist councils to begin to plan for the population ageing.

Bogan Shire Council

Section 4 Review of Financial Forecasts

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

years. The LTFP includes projections for each of Council’s funds, however no forecasts have been

prepared for Council’s consolidated position. We have focused our financial analysis upon the General

Fund as although Council’s consolidated position includes a Water and a Sewer Fund, 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.

Based on the most recent information available (Financial Statements 2012), TCorp made an

adjustment to the value of the deprecation in the General Fund in 2011, as it was previously mentioned

that this value was subject to an error in the 2011 Financial Statements.

4.1: Operating Results

The Operating Ratio is below the benchmark each year of the forecast. The forecasts show that

operating deficits are expected each year when capital grants and contributions are excluded (between

$0.6m and $0.9m deficits each year between 2013 and 2022).

In 2012, the ratio was skewed upwards, as Council’s operating results were favourably impacted by

increases in user charges and fees and in operating grants and contributions as indicated in section

3.1.

In 2013, the Operating Ratio is forecast to decrease below the benchmark as a result of an increase of

$1.8m in operating expenses to $12.1m while operating revenue (excluding capital grants and

contributions) are forecast to increase by $0.3m to $11.5m.

From 2014 onwards, the Operating Ratio remains static as each item is forecast to increase by 3.5%

p.a.

(8.0%)

(6.0%)

(4.0%)

(2.0%)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

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

Figure 7- Operating Ratio for General Fund

Operating Ratio Benchmark

Bogan Shire Council

4.2: Financial Management Indicators

Liquidity Ratios

The Cash Expense Ratio is consistently below the benchmark of three months between 2013 and

2021 due to Council investing each year most of its cash in term deposits with more favourable interest

rates. The ratio is skewed downwards in 2013 due to the substantial increase in operating expenses.

The other items used to calculate the ratio (cash and cash equivalent and depreciation) slightly

increase over time.

0.0 months

0.5 months

1.0 months

1.5 months

2.0 months

2.5 months

3.0 months

3.5 months

4.0 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

0.0 months

1.0 months

2.0 months

3.0 months

4.0 months

5.0 months

6.0 months

7.0 months

8.0 months

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

Figure 8a- Cash Expense Ratio for General Fund (including long term deposits)

Cash Expense Ratio Benchmark

Bogan Shire Council

When term deposits are included in the Cash Expense Ratio, the ratio is above the benchmark for the

review period, indicating Council will have sufficient liquidity.

The Unrestricted Current Ratio is above the benchmark of 1.50x each year of the forecast, indicating

Council has sufficient liquidity to service its short term liabilities. The ratio was skewed upwards in

2012 due to a high level of Net Assets excluding externally restricted assets and current liabilities.

Fiscal Flexibility Ratios

The Own Source Operating Ratio is consistently well below the benchmark of 60.0% indicating Council

will continue to depend on external funding sources such as operating grants and contributions.

0%

10%

20%

30%

40%

50%

60%

70%

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

2.73x

6.78x

2.11x 2.23x 2.39x 2.59x 2.69x 2.84x 3.00x 3.18x 3.36x 3.58x

0.00x

1.00x

2.00x

3.00x

4.00x

5.00x

6.00x

7.00x

8.00x

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

Figure 9 - Unrestricted Current Ratio for General Fund

Benchmark

Bogan Shire Council

The DSCR is above the benchmark of 2.00x each year of the forecast, indicating Council has the

capacity to service its existing loans as well as the additional loans that are scheduled.

Council forecasts to borrow $0.6m in 2013 in order to fund a residential development (construction of

two residences, one residence will be retained for Council’s staff, the other will be sold to offset costs of

construction).

Similar to the DSCR, the Interest Cover Ratio is forecast to be above the benchmark of 2.00x each

year, indicating Council has sufficient capacity to service scheduled debt commitments. Council has

further capacity to borrow before the ratio decreases to the benchmark of 4.00x.

51.43x

180.05x

67.29x 76.09x 86.70x 99.78x 116.06x 137.14x180.18x

227.89x

353.17x

730.33x

0.00x

100.00x

200.00x

300.00x

400.00x

500.00x

600.00x

700.00x

800.00x

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

Figure 12 - Interest Cover Ratio for General Fund

Benchmark

5.95x10.08x

23.75x

37.20x 38.53x 39.91x42.20x 43.64x 45.05x 45.58x

48.16x 48.69x

0.00x

10.00x

20.00x

30.00x

40.00x

50.00x

60.00x

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

Figure 11 - DSCR for General Fund

Benchmark

Bogan Shire Council

4.3: Capital Expenditure

The Capital Expenditure Ratio is near the benchmark of 1.10x each year of the forecast. The total

value of the capital expenditure ($29.3m) forecast for the 10 upcoming years is slightly higher than the

accumulated depreciation ($26.5m), indicating that Council’s asset base is expected to marginally

expand over time.

The main capital works forecast for the period between 2013 and 2022 include:

Plant purchases

Road works (including Pangee Street beautification)

Building upgrades (including the Visitors Centre fit out)

Upgrades of parks and gardens (including Rotary Park Path, Davison Park Playground and

Skate Park Shade Sails)

Refurbishment of the swimming pool

Village maintenance

0.70x

0.90x

1.10x

1.30x

1.50x

1.70x

1.90x

2.10x

2.30x

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

Figure 13 - Capital Expenditure Ratio for General Fund

Capital Expenditure Ratio Benchmark

Bogan Shire Council

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+1.0%)

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

Key Observations and Risks

The ‘business as usual’ scenario of the LTFP assumes that the service levels are being

maintained.

TCorp based its analysis on the actual figures for 2011 and 2012 for the General Fund as well

as the projections period between 2013 and 2022.

The LTFP has been built on projections for year 2012. As the current version of the LTFP has

not been updated with the actual 2012 figures, the forecasts show substantial variations in

2013 that will be reviewed once the LTFP is updated. From 2014 onwards, all items are

forecast to increase by 3.5% p.a.

Based on projected figures for 2012 as included in the LTFP, rates and annual charges were

forecast to increase by 1.4% ($0.1m) in 2013. Based on the actual 2012 figures, they are

forecast to decrease by 9.9% ($0.3m) in 2013.

Based on the actual 2012 figures, user charges and fees are forecast to decrease by 26.4%

($0.4m) and to increase by 23.4% ($0.3m) in 2014, these variations are related to RMS

charges.

Based on the 2012 projected figures, it appears that Council had forecast that the FAG would

remain relatively static in 2013. However, based on the actual 2012 figures, it appears that

the FAG (general and local roads components) will decrease by $0.6m in 2013 to $3.0m

which correspond to the adjustment to the prepayment in 2012 to half of the 2013 FAG.

Capital grants and contributions include two items: Road to Recovery grants (amounting to

$1.0m in 2013 and increasing by 3.5% p.a. from 2013 onwards) and block grants for road

repairs ($0.2m each year from 2013 onwards).

Based on projected figures for 2012, operating expenses were forecast to increase by 1.8%

($0.2m) in 2013. Based on the actual 2012 figures, operating expenses are forecast to

increase by 17.5% ($1.8m) in 2013. Council officers have indicated that this variation is due

to Council having capitalised a higher proportion of labour and plant hire in 2012. Council

Bogan Shire Council

have capitalised and transferred to the relevant capital accounts $0.2m in relation to wages

and $0.4m in relation to plant hires.

Based on the actual 2012 figures, annual depreciation is forecast to decrease by 22.0%

($0.6m) in 2013. It is forecast that as the LTFP is reviewed, that the projections will be refined,

the projections for depreciation in particular will be updated.

Overall, TCorp considers the assumptions behind the LTFP need to be reviewed. The use of

constant growth numbers of 3.5% for revenues and expenses is of some concern as a

declining population together with past trends indicate that forecasts future movements in

expenses and revenues may not be consistent.

Bogan Shire Council

4.5: Borrowing Capacity

When analysing the financial capacity of the Council we believe Council will not be able to incorporate

additional loan funding in addition to its existing debt facilities. Some comments and observations are:

Based on its credit metrics of DSCR and Interest Cover Ratio, Council has the capacity to

undertake additional borrowings.

However, as noted in our comments in section 4.1, the forecast shows that consistent operating

deficits are expected each year when capital grants and contributions are excluded. In TCorp’s

view, it would be prudent for Council to develop strategies to improve its operating position prior

to proceeding with any further borrowings

Council will also need to review and update its LTFP using more precise assumptions and

updated depreciation expense

4.6 Sustainability

Despite its small population, TCorp believes Council to be moderately sustainable in the short to medium

term. Council has recorded operating deficits when capital grants and contributions are excluded in three

of the past four years. The limited size of the rating base makes it difficult to address its forecast

operating deficits, manage unforseen financial shocks or any adverse changes in its business. In

addition, over the past four years, Council did not spend the required amounts on asset renewals. The

AMP for roads have highlighted that based on the current levels of resources, Council is likely to face a

funding shortfall for maintenance and renewal of those assets.

In considering the longer term financial Sustainability of the Council we make the following further

comments:

Council’s long term Sustainability would be aided by a diversification of its revenue sources

which might be difficult given the limited size of Council’s rating base

Council population has declined over the past decade and this trend is forecast to continue.

Regardless of this trend, it is unlikely that Council will manage to decrease its reliance on

operating grants and contributions. Further, the declining population will increase pressure on

the generation of revenue from its own sources

In recent years, Council did not spend sufficient amounts on asset renewals. If this trend

continues, this could lead to a reduction in the quality of the assets and ultimately impact service

standards.

Council has maintained a low level of borrowings in its General Fund over time. In the medium

term, Council may have capacity to take on debt to fund capital projects. However, consistent

operating deficits may prevent Council from adding further borrowings.

Bogan Shire Council

Section 5 Benchmarking and Comparisons with Other Councils

Each council’s performance has been assessed against ten key benchmark ratios. This section of the

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

DLG Group 9. There are 21 councils in this group and at the time of preparing this report, we have data

for all of these councils.

In Figure 14 to Figure 23, 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 17, 21, 22 and 23 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. For the Interest Cover Ratio and Debt Service Cover Ratio, we have excluded from the

calculations, councils with very high ratios which are a result of low debt levels that skew the ratios.

Financial Flexibility

Since 2010, Council’s Operating Ratio has outperformed the benchmark and the group average. Over

the medium term, Council’s Operating Ratio is forecast to substantially decline to a level below the

benchmark but it will remain above the peer group.

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2009 2010 2011 2012 2016

Figure 14 - Operating Ratio Comparison

Benchmark Highest Average Bogan Shire Council

Bogan Shire Council

Over the review period, Council’s Own Source Revenue Ratio was consistently below the benchmark

and the group average (with the exception of 2012). Council has been heavily reliant on operating grants

and contributions which is reflected in a relatively low Own Source Operating Revenue Ratio.

In the medium term, Council’s Own Source Operating Ratio is forecast to deteriorate and be below the

benchmark and the group average.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2009 2010 2011 2012 2016

Figure 15 - Own Source Operating Revenue Ratio Comparison


Bogan Shire Council

Liquidity

Over the review period, Council’s liquidity position has been sound compared to the benchmark though

Council’s Cash Expense Ratio and Unrestricted Current Ratio were generally below the group average.

In the medium term, Council’s liquidity position is forecast to remain sound but below the peer group.

0.0 months

5.0 months

10.0 months

15.0 months

20.0 months

25.0 months

30.0 months

2009 2010 2011 2012 2016

Figure 16 - Cash Expense Ratio Comparison


1.00

3.00

5.00

7.00

9.00

11.00

13.00

15.00

2009 2010 2011 2012 2016

Figure 17 - Unrestricted Current Ratio Comparison


Bogan Shire Council

Debt servicing

Council’s debt servicing capacity has been sound over the review period compared to the benchmark.

Council’s DSCR was consistently below the peer group while Council’s Interest Cover Ratio was above

the group average in two of the past four years.

In the medium term, Council’s debt servicing capacity is forecast to remain sound and outperform the

group average.

-

20.00

40.00

60.00

80.00

100.00

120.00

2009 2010 2011 2012 2016

Figure 18 - Debt Service Cover Ratio Comparison


-

50.00

100.00

150.00

200.00

250.00

300.00

2009 2010 2011 2012 2016

Figure 19 - Interest Cover Ratio Comparison


Bogan Shire Council

Asset Renewal and Capital Works

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2009 2010 2011 2012 2016

Figure 20 - Capital Expenditure Ratio Comparison


-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2009 2010 2011 2012

Figure 21 - Asset Maintenance Ratio Comparison


Bogan Shire Council

Over the review period, Council’s level of Infrastructure Backlog was consistently below the group’s

average level. Council’s spending on maintenance of assets tracked the benchmark and the peer group.

Council’s performance in terms of capital expenditure was mixed, Council’s ratio outperforming the

benchmark and the group average in two of the past four years. In the medium term, Council’s Capital

Expenditure Ratio is forecast to decline and be below the benchmark and above the group average.

Council’s performance in terms of building and infrastructure renewal was weak against the benchmark

and the peer group.

-

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

2009 2010 2011 2012

Figure 22 - Infrastructure Backlog Ratio Comparison

Benchmark Lowest Average Bogan Shire Council

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2009 2010 2011 2012

Figure 23 - Building and Infrastructure Asset Renewal Ratio


Bogan Shire Council

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 moderately sustainable in the short to

medium term. The forecast declining population, and the continued operating deficits forecast will

eventually have a negative effect on Council’s ability to replace key infrastructure assets as they become

due for renewal.

We base our recommendation on the following key points:

Over the past four years, Council had sufficient liquidity

Over the review period, Council had a low level of borrowings and some flexibility in regard to

carrying more debt

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

Council forecasts continuing operating deficits when capital grants and contributions are

excluded. While sustainable in the short to medium term, Council may be unsustainable in the

longer term unless additional revenues can be sourced, further efficiencies found, or service

levels reviewed

Council is dependent on external revenue sources such as State and Federal grants. Any

material adverse change to the levels of grants receivable would severely weaken Council

finances

Council population has declined over the past decade. If this trend continues, it is unlikely that

Council will manage to decrease its reliance on operating grants and contributions

Council is not spending sufficient amounts on asset renewal and in the long term this could lead

to a reduction in asset quality and service levels

Council needs to review its LTFP and update the underlying assumptions to more realistic levels

before a comprehensive assessment can be made

Bogan Shire Council

Appendix A Historical Financial Information Tables

Table 1- Income Statement

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

2012 2011 2010 2009 2012 2011 2010

Revenue

Rates and annual charges 3,561 3,289 3,107 2,944 8.3% 5.9% 5.5%

User charges and fees 2,317 1,400 1,012 1,011 65.5% 38.3% 0.1%

Interest and investment revenue 331 365 329 362 (9.3%) 10.9% (9.1%)

Grants and contributions for operating purposes 6,272 5,614 5,187 5,218 11.7% 8.2% (0.6%)

Other revenues 265 263 187 163 0.8% 40.6% 14.7%

Total revenue 12,746 10,931 9,822 9,698 16.6% 11.3% 1.3%

Expenses

Employees 4,407 3,873 3,806 3,905 13.8% 1.8% (2.5%)

Borrowing costs 21 57 91 125 (63.2%) (37.4%) (27.2%)

Materials and contract expenses 2,883 2,814 3,168 3,391 2.5% (11.2%) (6.6%)

Depreciation and amortisation 3,386 3,183 1,922 1,875 6.4% 65.6% 2.5%

Other expenses 1,291 1,342 1,108 928 (3.8%) 21.1% 19.4%

Total expenses 11,988 11,269 10,095 10,224 6.4% 11.6% (1.3%)

Operating result (excluding capital grants and contributions) 758 (338) (273) (526) 324.3% (23.8%) 48.1%

Operating result (including capital grants and contributions) 1,685 2,609 518 (388) (35.4%) 403.7% 233.5%

In 2010 and 2012, TCorp included the ‘Net Share of interests in Joint Ventures and Associated Entities

using the equity method’ in ‘Other Revenues’

In 2009 and 2011, TCorp included the ‘Net Share of interests in Joint Ventures and Associated Entities

using the equity method’ in ‘Other Expenses ’.

Table 2 - Items excluded from Income Statement

Excluded items ($’000s)

2012 2011 2010 2009

Grants and contributions for capital purposes 927 2,947 791 138

Net gains from the disposal of assets 17 182 50 81

Bogan Shire Council

Table 3 - Balance Sheet

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

2012 2011 2010 2009 2012 2011 2010

Current assets

Cash and equivalents 4,192 3,572 2,435 3,940 17.4% 46.7% (38.2%)

Investments 1,800 1,320 3,320 1,000 36.4% (60.2%) 232.0%

Receivables 1,942 2,232 1,359 1,446 (13.0%) 64.2% (6.0%)

Inventories 254 260 286 287 (2.3%) (9.1%) (0.3%)

Other 192 194 203 4 (1.0%) (4.4%) 4975.0%

Total current assets 8,380 7,578 7,603 6,677 10.6% (0.3%) 13.9%

Non-current assets

Receivables 320 388 500 766 (17.5%) (22.4%) (34.7%)

Infrastructure, property, plant & equipment 223,339 219,453 363,719 154,988 1.8% (39.7%) 134.7%

Investments accounted for using the equity method

67 61 73 42 9.8% (16.4%) 73.8%

Total non-current assets 223,726 219,902 364,292 155,796 1.7% (39.6%) 133.8%

Total assets 232,106 227,480 371,895 162,473 2.0% (38.8%) 128.9%

Current liabilities

Payables 580 975 591 601 (40.5%) 65.0% (1.7%)

Borrowings 24 377 430 454 (93.6%) (12.3%) (5.3%)

Provisions 825 757 868 810 9.0% (12.8%) 7.2%

Total current liabilities 1,429 2,109 1,889 1,865 (32.2%) 11.6% 1.3%

Non-current liabilities

Borrowings 3 4 379 789 (25.0%) (98.9%) (52.0%)

Provisions 188 42 52 56 347.6% (19.2%) (7.1%)

Total non-current liabilities 191 46 431 845 315.2% (89.3%) (49.0%)

Total liabilities 1,620 2,155 2,320 2,710 (24.8%) (7.1%) (14.4%)

Net assets 230,486 225,325 369,575 159,763 2.3% (39.0%) 131.3%

Bogan Shire Council

Table 4-Cashflow

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

2012 2011 2010 2009

Cashflows from operating activities 5,115 5,000 2,215 1,679

Cashflows from investing activities (4,141) (3,435) (3,286) (2,345)

Proceeds from borrowings and advances 0 0 0 0

Repayment of borrowings and advances (354) (428) (434) (461)

Cashflows from financing activities (354) (428) (434) (461)

Net increase/(decrease) in cash and equivalents 620 1,137 (1,505) (1,127)

Cash and equivalents 4,192 3,572 2,435 3,940

Bogan Shire Council

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.

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

Bogan Shire Council

EBITDA

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 infrastructure, building, other structures

and depreciable land improvements 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.

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)

Bogan Shire Council

Integrated Planning and Reporting (IP&R) Framework

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.

Bogan Shire Council

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.

Sustainability

A local government will be financially sustainable over the long term when it is able to generate sufficient

funds to provide the levels of service and infrastructure agreed with its community

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)*12

http://www.lanecove.nsw.gov.au/Council%20Services/Development%20Control/Development%20Controls/Contributions%20Plans/documents/SECTION94PLANinclamendmentsof160204.pdf

http://www.lanecove.nsw.gov.au/Council%20Services/Development%20Control/Development%20Controls/Contributions%20Plans/documents/SECTION94PLANinclamendmentsof160204.pdf

Bogan Shire Council

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

Building and 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

Bogan Shire Council

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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