Strategy and Assets Committee

 

 

Meeting Date:    Tuesday, 11 October, 2016

Location:            Council Chambers, City Administrative Centre, Bridge Road, Nowra

 

 

Attachments (Under Separate Cover)

 

 

Index

 

4.    Reports

SA16.4       Berry District Park - Re-exhibition of  Master Plan

Attachment 2... Summary of Submissions - Berry District Park Re-exhibition 2

SA16.5...... Crime Prevention Plan 2016 - 2021

Attachment 1... Crime Prevention Plan - Draft - 2016................................... 28

SA16.7...... Application for a Special Rate Variation

Attachment 1... Financial Sustainability Document........................................ 43                               


 

Strategy and Assets Committee – Tuesday 11 October 2016

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Strategy and Assets Committee – Tuesday 11 October 2016

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Strategy and Assets Committee – Tuesday 11 October 2016

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Report on Financial Sustainability

 

Shoalhaven City Council

General Fund

2nd Edition

September 2016

 

 

 

 

 

 

 

 

 

 

 

Authors

Craig Milburn

Pam Gokgur

 

 

 

 

 

 

 

 

 

Contents

 

1.      Introduction.. 4

2.      Background statement/history. 6

3.     Guiding Principals. 11

3.1  Organisational Vision.. 13

3.2  Mission Statement 14

3.3  Values. 15

4.    SWOT Analysis. 16

4.1  Strengths. 17

4.2  Weaknesses. 17

4.3  Opportunities. 18

4.4  Threats. 18

5.    Major Goals. 18

5.1  Overall Objective – Financial sustainability. 18

5.2  Increase Revenue. 23

5.2.1 Rates Increase. 23

5.2.2 Fees and Charges. 27

5.2.3 Increases DA Fees and introduce value added services. 28

5.2.4 Introduction of Parking fees. 29

5.3  Reduce Cost Structure – drive efficiency. 29

5.3.1 Continuous Improvement 29

5.3.2 Outsourcing. 29

5.3.3 Use of Technology. 30

5.3.4 Procurement 30

5.3.5 Staff Changes and conditions of employment 30

5.3.6 Energy Management 30

5.3.7 KPI Reporting. 31

5.3.8 Joint Organisation.. 31

5.3.9 Better Management of Fringe Benefits Tax. 32

5.3.10 Better Management of Leave Liabilities. 32

5.3.11 Reduced Service Levels. 32

5.3.12 Improved Fuel Efficiencies. 32

5.4  Service Sustainability. 32

5.5  Asset Utilisation.. 33

5.5.1 Only commit to Justified Renewal Projects. 34

5.5.2 Selling off Under-utilised Assets. 34

5.5.3 Asset Rationalisation/Optimisation.. 34

5.5.4 Pensioner Rates Deferral 36

5.6  Review Capacity to borrow.. 36

5.7 Cultural change. 38

5.8 Increase Renewal Expenditure. 38

5.9 Increase Maintenance Expenditure. 39

5.9 Other Non financial improvements. 40

5.9.1 Leadership Development 40

5.9.2 Business Planning. 40

5.9.3 Staff Climate Survey. 40

5.9.4 Project Management Methodology. 40

5.9.5 Capital Works Carry-overs. 40

5.9.6 Customer Service – One stop shop. 40

5.9.7 Branding and Marketing. 40

6.    Risks. 41

7.    Evaluation.. 42

8.    Recommendations. 43

 


Shoalhaven City Council

Report on Strategic Direction

1.        Introduction

In October 2012 NSW Treasury Corporation presented a Financial Assessment and Benchmarking Report on Shoalhaven City Council.  The analysis was based on historical performance, current financial position, and long term financial forecasts.  Further to this it benchmarked Council against its peers using key ratios.

The review found that:

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

·    Whilst Council has incurred operating deficits (excluding grants and contributions for capital purposes), Council’s underlying operating result (measured using EBITDA) has improved from $40.3m in 2009 to $45.1m in 2011.

·    Approximately 76% of the Council’s revenue base is derived from own sourced revenue (annual charges, and user charges and fees).  They can rely upon these revenue streams on an ongoing basis for financial flexibility.

·    The Council is facing pressure from rising employee costs, and material and contract costs above inflation but it has acknowledged the issue and is seeking to address this through expenditure review measures.

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

·    The forecast shows deficit positions excluding capital grants and contributions in all forecast years, this already has factored in Transformation Program savings year on year.

·    The Council’s forecast liquidity position starts to weaken from 2015 when the Unrestricted Current Ratio falls to 1.74:1, limiting available funding.

·    Council’s level of fiscal flexibility, as indicated by its above benchmark Own Source Operating Revenue Ratio, is sound when excluding the impact of internal transactions.

In addition to this Council has reported $43.1m of Infrastructure Backlog in 2011 which represents 2.3% of its infrastructure asset value of $1,873m.  However as part of the Fit for the Future analysis carried out it was determined that the level of infrastructure backlog reduced to $10.4m if you utilised the service level expectations for assets, not the previous criteria based on higher standards which was utilised.

It should be recognised that the newly elected council in 2012 made a number of decisions to that commenced addressing the long term financial situation of the organisation.   This included an increase in the general rate and to introduce an efficiency review.  In response to this in February 2013 Blackadder Associates Pty Ltd prepared a report after an organisational structure and associated review, with an emphasis on savings and efficiencies and improvements to customer service. Council further sought direction on achieving financial sustainability.  The review highlighted eight (8) areas for improvement:

·    Alignment of Strategy to Operations

·    Leadership

·    Financial sustainability

·    Asset Management

·    Corporate Systems

·    Project Management

·    Organisational Culture

·    Customer Service

More recently the Office of Local Government has released a roadmap for Stronger, Smarter Councils, where they have also announced funding for ensuring local government is Fit for the Future.

A Fit for the Future council should be:

·    Sustainable

·    Efficient

·    Effectively manages infrastructure and delivers services for communities; and

·    Has scale and capacity to engage effectively across community, industry and government.

Further to this the New Local Government Act will reflect that DP/OP guidelines will be amended to embed the principle of fiscal responsibility and improve financial and asset planning as part of IPR process from 2016.

The Office of Local Government see sustainable Councils as ones which:

·    Saves money on bureaucracy and administration, freeing up funds for front-line services and community facilities

·    Can contribute to projects and tackle issues that impact on its residents and extend beyond the council boundary:

·    Has credibility and influence across councils, across government and with industry

 

During May 2015 Council submitted the Template 2 Submission with regard to Fit for the Future.  This report highlighted that at that particular time Council would not meet all of the seven benchmarks set, and in fact only 3 of the 7 measures were achieved.  The Own Source Revenue Ratio, the Debt Service Ratio and the Real Operating Expenditure per capita ratio. 

 

Council determined that it could meet a further three benchmarks within the next four years by implementing the strategies covered in this report.  These ratios included the Operating Performance Ratio, the Infrastructure Backlog Ratio and the Asset Maintenance Ratio.

 

One Ratio was highlighted as not being achievable, the Building and Infrastructure Asset Renewal Ratio, which was incongruent with the depreciation methodology used for Shoalhaven City Council.

 

Regardless of the above on 21st October 2015, Council was deemed to be “Fit for the Future” in that they met all seven (7) criteria.  Council will now be measured by the OLG against this proposal.

 

This paper aims to expand on the Financial Sustainability theme by consolidating the above improvement areas and OLG direction for Fit for the Future Councils into a strategic plan for Council in order to reduce the annual operating deficit and meet all 7 benchmarks set by the OLG and form a cohesive approach from all staff and Councillors to be focused on this challenge.

It needs to be noted that if Council’s do not move towards/meet the Fit for the Future requirements the OLG can issue a “Performance Order” requiring Council to take the necessary financial steps to meet the criteria.  If Council still is not meeting the criteria the OLG can appoint an external Financial Specialist to make the necessary decisions.  Should this not produce the required results the OLG has the option of dismissing the Council and appointing Administrators to take control of the Council and make all the necessary decisions to make the organisation financially sustainable. 

Council’s current financial trajectory if no rate increases are made would see the need to cut on average $11.69M each year or $116.9M over 10 years from its ongoing service delivery.  This would have very significant impacts on the community.  The current Fit for the Future strategy (including 2 x 7.5% rate rises over rate peg increases) sees a shortfall of $3.432 per year.  This has come about as a result of increases in the Emergency Service Levy Council is required to pay of approximately $870,000 per year and a reduction in the current and future years rate peg amount.  The 2016/17 rate peg amount issued by IPART was 1.8%.  In preparing the Fit for the Future application Council was advised to use 2.5% for all future years.   The one year impact of this reduction is $450,000 and has an extensive cumulative impact.  The revised model has future year’s rate peg increased set at 2%.

To now meet the Fit for the Future criteria two rate rises of 11.5% over the rate peg amount will be required.  The basis for this and details of Council’s position are outlined in detail in the remaining sections of this report.

2.        Background statement/history

From 1859, the demand for Local Government by residents of the widely scattered settlements within the Shoalhaven saw a number of Municipal areas declared.

On the 1st July, 1948 the Shoalhaven Shire Council was formed by amalgamating the following Councils:

·    Nowra Municipal Council

·    Berry Municipal Council

·    South Shoalhaven Municipal Council

·    Broughton Vale Municipal Council

·    Cambewarra Shire Council

·    Clyde Shire Council

·    Ulladulla Municipal Council

Subsequent to this Shoalhaven City Council was proclaimed on 1st August, 1979.

The amalgamation of these widely scatter townships culminated in some of the current day issues encountered, with the geographic expanse of infrastructure assets, duplication of Council assets, multiple views on priorities resulting in competing priorities for where monies should be spent.

Over this time Council has encountered many changes in terms of

·    complexity of operations,

·    diversity of services provided,

·    infrastructure requirements or expectations,

·    expansion of development and requirements for services,

·    demand from local communities for provision of facilities. 

At the same time staffing levels have increased to support these requirements, systems have not kept up with the times and technologies are fast overtaking Council capabilities.

And now given the age of some of Councils assets, Council is in the unfortunate position that a significant infrastructure backlog is evident, and with each passing year continues to grow as Council does not have the funds to supports its maintenance.

The structure of Local Government Council hampers decision making with conflicting priorities between the elected Council (which is made up of the Mayor and 12 Councillors across 3 Wards) and Council administration, led by the General Manager, who is responsible for the day to day operations and ensuring that the decisions of the elected Council are implemented.

There are 4 Directorates reporting to the General Manager:

·    Corporate and Community Services

·    Planning and Development Services

·    Assets and Works

·    Shoalhaven Water

Currently Council employs approximately 908 FTE staff across these directorates, with the split for staff being 575 indoor staff and 333 outdoor staff.

This report will focus on General Fund, therefore all subsequent information in this document will relate to the financial sustainability of General Fund, in isolation from Shoalhaven Water.

Table 1 below shows a snapshot of the Long Term Financial Plan for General Fund based on the current Budget and Long Term Plan (which includes a 7.5% rate increase over rate peg for 2017/18 and 2018/19):

Table 1 - General Fund Income Statement

 

Table 2 below shows the Cash flow Statement for General Fund.  You can see from the below cash flow even though the rate increase is introduced in 2017/2018, cash depletes by almost $7m and it takes a number of years to turn this situation around.

 

 

Table 2 General Fund Cash Flow

 

Fit for the Future Ratios, (based on 7.5% increase above rate peg for 2 years) are shown below, reflecting the work required to meet all 7 benchmarks by 2019/20, given only 4 of the 7 ratios are currently met.

Measure

Benchmark

2015/16 performance

Achieve  FFTF benchmark

Forecast 2016/17

Achieve FFTF benchmark

Operating Performance Ratio

Breakeven over 3 years

-5.0%

No

-5.1%

No

Own Source Revenue

Ø 60%

81.2%

Yes

81.0%

Yes

Building and Infrastructure Asset Renewal

Ø 100% (3 year avg)

62.6%

No

59.8%

No and trending down

Infrastructure Backlog Ratio

< 2%

0.8%

Yes

0.8%

Yes

Asset Maintenance Ratio

Ø 100% (3 year avg)

91.0%

No

91.0%

No

Debt Service Ratio

0<DSR>20%

4.1%

Yes

4.7%

Yes

Real Operating Expenditure per capita

Decrease over time

1484

No

1471

Yes

Table 3 - Fit for the Future Ratios

The size of the current operating gap before grants is substantial at - $34m over the next 10 years.  The Fit for the Future submission planned for Council to meet the operating performance ratio by 2020.  However given the reduction in the rate peg along with further cost shifting from the State Government for emergency services, the forecast result for the next couple of years has deteriorated, even though the actual result from 2015/16 was better than expected.  Figure 1 shows a comparative of the original submission, along with our current Long Term Financial Plan and in addition a further strategy, as covered later in this document, to achieve this ratio by 2019/2020.  The latter strategy is the recommended approach.

Figure 1 - Operating Performance Ratio before Grants

 

Funding for the organisation comes from multiple sources as shown below in Figure 2:

Figure 2 - Income Split

What can be seen from these figures is that council only captures 36% of its revenue in General Fund from rates and annual charges and a high proportion comes from user fees and charges as well as other revenue items such as fines, rental income, waste levy, etc.  But the risk which is obvious from the above split is the reliance on Grant funding which is at 16% overall and equates to $35m in total.  With increased cost shifting from Federal and State Governments to Local Government, Council could see this number diminish, placing more reliance on revenue Council generates from other services.  This is further restricted by the fact that rates revenue is capped to a certain extent by IPART setting the rate peg.

3.     Guiding Principals

Council needs to be guided by the Integrated Planning and Reporting regime but also by a shared sense of urgency and a shared vision.  It needs to break down bureaucratic walls and create some currency around processes, technology and work habits to be able to move towards a future state, in unison with the elected council, not in opposition to.  It is of utmost importance that elected Councillors are educated on the current financial situation of Council, which should guide them in decision making with the best financial outcomes in mind.  Councillors are responsible for strategic planning for the whole community and a sustainable future, along with determining the financial strategy and allocating resources for council through the budgeting process, so it is of utmost importance that each proposal for expenditure needs to be supported by a business case and needs to be justified and prioritised in order of the below criteria:

·    Is it work required for statutory purposes

·    Is it to address emergency situations

·    Is it to eliminate hazards or eliminate risks

·    Is it to meet contractual obligations

·    Is it to perform necessary renovations or repairs (which will reduce ongoing operating expense)

·    Is it to replace equipment

·    Is it funded by state or federal government departments

·    Is it a continuation of an existing project which cannot be deferred

·    Is it to satisfy a community need or provide an improved level of customer service

If not and not funded then it is a desirable project for non-essential reasons and should be deferred until funds are in place to pursue.

This criteria needs to be in front of mind of staff and councillors when approving capital budgets and needs to be incorporated into Council’s planning cycle.

In addition to this, work needs to be carried out to ensure that carryover funding is kept to a minimum, below are some core principles to consider when requesting capital funding:

At “budget bid” stage a “business case” is required, covering the following:

·    A delivery program, identifying each phase of the project

·    A detailed cost estimate for each phase of the project

·    A cash flow forecast to reflect the delivery program, so funds are allocated to the appropriate year

·    Anticipated lead times for the supply of critical components

·    Project relationship to the Strategic Plan or Asset Management Plan

·    Design development phase needs to be undertaken preceding the financial year to which they are scheduled to be delivered

·    Whole of life costs, particularly recognising any increase in future years operational expenditures needs to be considered from the outset of a capital request.

 

A list of projects suitable for grant funding should be developed to a stage where the design documentation can be completed quickly once funding is received.  These projects should have project risks identified and preliminary cost estimates and construction programs prepared.

 

The overall capital works program should be prepared in conjunction with the budget preparation and the following should be identified:

·    The project custodian responsible for project delivery

·    The extent of works scheduled in that Financial Year

·    The resource requirements and whether external resources might be required

·    The lead times and delivery risks

 

Monthly reviews should be instigated and program slippages identified and strategies developed to deliver the project on time.

 

3.1  Organisational Vision

 

The Vision is to “Make the Shoalhaven a great place to live, work, stay and play”.  A shared vision is vital to achieve the outcomes desired.  However the Vision needs to be able to be directly related to the work that employees are doing, otherwise it is not a shared vision.  Further definition is required to ensure that Councillors and Council staff are all working towards the same ultimate goal and every effort is made to streamline processes and continually improve the efficiency of the organisation. 

A fully integrated suite of IP&R documents will help provide clarity to both the Councillors vision and the Council Strategy.

Council also surveys the Community on a regular basis, the most recent survey being completed in June 2016.  Overall 87% of Shoalhaven residents recorded medium to high satisfaction with the performance of Council.  This level of satisfaction was consistent across all demographic groupings, with statistical testing unable to identify any significant differences across segments of the resident population.

Normative data from the Australian Unity Wellbeing Index indicates that the average Personal Wellbeing Index for Australians is approximately 76 (Sep 14). Shoalhaven LGA’s Personal Wellbeing Index was calculated as being 77.13 which is considered above average for Australian communities. Approximately 70% indicated they were highly satisfied with feeling part of the community.

The IP&R planning cycle is shown below in Figure 3, and shows the integration of community engagement with the strategic plan and subsequent delivery program and operational plan for Council.

Figure 3 -IP&R Planning Cycle

 

3.2  Mission Statement

Councils Mission is to “Enhance Shoalhaven’s strong communities, natural, rural and built environments and appropriate economic activities through strategic leadership, good management, community engagement and innovative use of resources”.

This mission statement should be driving how Council behave as an organisation.  The internal factors of strategic leadership, good management, community engagement and innovative use of resources were all highlighted as part of a staff survey from 2014 as areas which require attention.  Action plans were developed to respond to this survey, which should be related directly to the overarching Mission of Council.

The strategy map below in Figure 4 tries to further drill down on Council Vision and incorporate the Business Plan, underlying philosophies and KPI’s to encapsulate what drives Council and what we are ultimately trying to achieve.

Figure 4 - Strategy Map

 

3.3  Values

Council’s four key workplace values are aimed at driving a culture and organisation that staff wish to work for. These are:

·      How we work together

·      How we behave at work

·      The sort of workplace we aspire to

·      The way we lead and manage work

Below is a snapshot of Council Workplace Values (Figure 5), which are critical to implementing any changes across the organisation.  Some of the values are inherent in making changes within an organisation to deliver a far superior level of service to the community ie deliver best value service, best practice organisation, preferred employer, drive customer service, improving our use of technology, innovative and empowered.  These values also align directly to the Strategic goals suggested further on in this paper.

http://sccintranet/portals/0/images/workplacevalues.png

Figure 5 - Council Values

4.    SWOT Analysis

In order to be able to implement a plan for moving forward Council needs to position ourselves now, what is the status quo and how do we move from the current situation to an improved position in the future? 

Below is a summary of our strengths, weaknesses, opportunities and threats to help us arrive at a detailed plan to move forward.

4.1  Strengths

·    We are a large Council and therefore have economies of Scale of which we can call on

·    There are over 56,000 ratepayers within the Council area

·    Council has dedicated, experienced and long serving employees with a high retention rate

·    We are situated in a great location, close to major population centres of Sydney, Illawarra and Canberra

·    Highly desirable tourist destination during holiday periods

·    Tourism is increasing in the area, along with a strong rural sector and naval base

·    We should see growth in future years, given the proximity to improvements in the road network to Sydney and Canberra. 

·    The sea change phenomenon is also contributing to growth

·    We have been allowed to stand alone as a Council (no Merger)

·    Strong bias towards strategic business and community management

·    Council has a high Community Satisfaction rating from recent surveys

4.2  Weaknesses

·    Increasing aged population and demand for services, particularly transport to town and villages.  This may impact on revenue collection in the longer term

·    We are forecasting operating deficits (before Capital Grants and Contributions) for all of the  next 10 years, ie $116.9m in total over this time (without any rate increase)

·    Given the council size we have multiple duplicated assets across the council area – which need maintenance and renewal, serving a thinly spread population and isolated villages

·    We have significantly greater lengths of road networks per ratepayer to maintain than from a lower rating base.

·    We have a backlog of infrastructure work required to bring our assets up to the standard required and this is continuing to deteriorate year on year.

·    There is an aging workforce, which results in risks from a workers compensation viewpoint, and a loss of knowledge on retirement

·    Higher levels of unemployment, 8.83% (March 2016) compared to 6.6% regional average means less disposable income and less ability to pay for services

·    Unfunded S94 and other liabilities, such as asbestos affected properties and gas remediation requirements

·    Council had to abort the implementation of Civica, resulting in reliance on poor systems until new systems can be implemented

·    Still a long way to go with regard to e-commerce and automating processes.

·    Population density in 2015 was only 0.22 persons/hectare, spread over 49 towns and separated by environmentally sensitive areas.

 

4.3  Opportunities

·    We have the capacity to borrow more to fund infrastructure works and new projects

·    Borrowing rates have reduced for NSW Councils, through Treasury Corporation for infrastructure type investments

·    Develop systems to provide better information to manage assets and provide management data

·    We have the opportunity to develop monthly KPI’s which will give us a better indication of how we are travelling in a more timely manner

·    We are in a better position to offer service provision to smaller councils

·    With changes to transportability of people and the culture of using cars to attend social functions, shop, take children to school, etc, we have the opportunity to rationalise some facilities to reduce costs. (We currently have the Ross report, which is about to go to Council)

·    To implement new systems to bring about technology improvements and efficiencies.

·    Good proximity for resource sharing with Illawarra Councils

·    Increase of commercial development in the smaller villages may reduce the transport needs of isolated residents

·    Shoalhaven average rates are 80% of the average rates of surrounding councils and group 5 councils, therefore there is capacity for an increase.

·    Increasing the use of technology based communication by residents may provide a closer relationship with council, and overcome the tyranny of distance.

4.4  Threats

·    Further cost shifting from State and Federal Governments

·    Further reductions in Grant Funding

·    Increases in CPI risk increases to current cost structures

·    Reductions in Australian Dollar would also further push costs up.

·    Increasing unplanned reduction in services as assets fail over time in the future

·    Reductions in Interest Rates resulting in decreased income from investments

·    Dividends from Shoalhaven Water may not always be available given some of the significant expenditures required in future years.

·    Decreasing condition of infrastructure due to inability to fund appropriate level of service

·    Inability to meet higher community expectations for service delivery

·    Further decrease in manufacturing viability further increasing local unemployment

·    Adverse impacts of climate change, rising sea level and more intense severe weather events

5.    Major Goals

5.1  Overall Objective – Financial sustainability

The current operating deficit is the driving force for this strategic plan, below is a snapshot of the General Fund LTFP (Table 4)  with all but 3 of the next 10 years showing operating deficits before Grants , with this year exceeding $14m (ie before the rate increase is implemented).  It should be noted that this is not a cash result but shows the effect of significant depreciation (a non cash item) as a result of asset revaluations in accordance with Accounting Standard AASB 13.  When an asset is purchased it generally has a life of more than one year, so depreciation is a way of transferring a portion of the assets costs from the balance sheet to the profit and loss during each year of the assets life.  It is a way of matching the cost of the asset to the revenue generated from that asset, over its useful life.  Without depreciation the entire cost of the asset would need to be recognised or expensed at the time of the purchase, so it cannot be ignored in reviewing results.

Table 4 - General Fund Income Statement (including two 7.5% above rate peg increases)

Figure 6 below shows the cumulative effect of the deficit operating mode, resulting in over $116.9m over the next 10 years, if no special rate is applied at all

 

 

 

 

Figure 6 - Cumulative Losses with no SRV

 

Further to this, Table 5 shows the Key Financial indicators, with a number of areas of some concern, particularly the unrestricted current ratio which is deteriorating year on year, the aim is for this ratio to be greater than 1.5:1 for financial sustainability and we see it moving from over 2.3:1 in 2015/2016 to as low as 1.47:1 2021/2022.  The other measure which highlights the gap in capital spending to depreciation is the Building Infrastructure Renewals Ratio which is well below the 100% target, shown in Table 6.

Table 5 General Purpose KPI's

Loan Interest Coverage is averaging around 1.4% over the next 10 years, which is low in terms of the benchmark ratio of 5% of operating income, but it needs to be reiterated that unless Council can generate additional revenue or reduce its overall cost base this ratio does not give a clear picture of council capabilities.

The Building and Infrastructure Asset Renewal Ratio or the capital expenditure ratio measures the extent to which Council are replacing assets compared with the rate at which we are depreciating or consuming them.  See Table 6 and Figure 7 below showing this measure and the issues Council have in terms of meeting this criteria, ie.  This percentage is substantially less than 100% for all future years.  The dollar impact of this shortfall is in the table below and further analysed in the graph below:

Table 6 Capex to Depreciation

Figure 7 Asset Sustainability Ratio

The cumulative shortfall of capital spend is shown below in Figure 8, highlighting the shortfall in Capital Spend:

Figure 8 - Cumulative shortfall Capex to Depreciation

 

With changes to the Accounting treatment of valuation of assets, each year Council is required to make fair value adjustments to certain categories of assets.  Below is Figure 9 which shows historical asset values and the resultant depreciation increases in the subsequent years.  This obviously has an impact on the overall operating result, which may further impact on our future results as assets are further increased in value and greater depreciation is required.

Figure 9 - Asset Revaluations to Depreciation

However if we are to also cover the annual shortfalls created from infrastructure funding deficits as well as cover the infrastructure backlog Figure 10 below shows what the operating deficit would look like.  Note that this chart below includes the 7.5% for 2 consecutive years above rate peg increase

Figure 10 - Cumulative impact of Op Result + backlog + maintenance

The overarching objective is to reduce Councils overall deficit to a balanced operating plan and the subsequent objectives and recommendations will ultimately achieve financial sustainability within a 4 year timeframe from the end of 2015/16 financial year.

There are a number of levers to pull with regard to achieving this goal, which are covered below in detail.  It is important that Council see the urgency and importance to take the necessary action to address this issue.  It is also important that the organisation take a long lens to this and put plans in place over a number of years, not just the next 1 – 2 years.

In providing the required strategic leadership Council needs to take the community along this longer term journey to sustainability. The Fit for the Future strategies have been included in the below recommendations, in line with the Report submitted to the Office of Local Government.

5.2  Increase Revenue

5.2.1 Rates Increase

Future rating strategies need to be considered in terms of anticipated growth in the city, future services and service levels, along with changes to Government Funding.  A review was carried out in 2015/16 by KPMG with regard to business rates in the Shoalhaven.  The outcome of the review was a fairer distribution of rates across residential and business ratepayers, all but eliminating historical inequities for Nowra CBD ratepayers.  More work is still required with regard to the much lower rates currently charged to Dairy Farmers,

Further work has also been completed to assess the level of rating increase required in the future to assist with reducing the overall backlog of infrastructure requirements as well as enabling financial sustainability moving forward.  The financial projections result in a requirement to increase rates over and above rate peg by 23% in total, 11.5% in 2017/18 and 11.5% in 2018/19.  This is on top of a rate peg estimated at 2% for each of these years and into the future.

This proposal for a rate increase has also factored in growth estimates in the future, which has resulted in increased costs of servicing the growing community and additional stress on infrastructures already in place and in some instances additional infrastructure.

Further consideration needs to be factored in with regard to the demographics of the Shoalhaven, the education levels which are lower than National average, the level of unemployment at 13% in 2013. These factors impact on the ability to pay and are important considerations in keeping the increase in rates at the minimum level to achieve Councils objectives.  On the flip side the location and lifestyle make the area a growth area in terms of population, with estimates that the population will exceed 130,000 by 2036.  There is a thriving defence industry, it is a regional manufacturing centre and a growing educational hub, and natural resources and tourism go hand in hand to increase the population movement.

It has been found through studies done by the SA Centre for Economic Studies that CPI is not an appropriate indicator to consider in relation to Council rates.  Secondly, council rates are determined by more than average costs in a previous year.  Local Government sets property rates in response to various factors including general price inflation affecting local government, policy decisions regarding changes in the level of services and community infrastructure provided to local communities, changes in demand for particular services and changes in financial support provided by other levels of government.  It was found that a more reliable independent measure is the Local Government Pricing Index which was developed by the ABS on behalf of the South Australian Government Financial Management Group. 

A further consideration is the comparison of residential rates of other councils within our Council Group, which further shows there is scope to increase rates by more than CPI and to still be under “like” councils rates.  The Group Average for Ordinary Residential Rates is $1110.

Council

Average Rates 2015

Average Household Income #

Ratio

At 2.0%

Differential

Shoalhaven

$888

$50,363

1. 76%

$1007

$120

Coffs Harbour

$978

$54,077

1.81%

$1081

$104

Port Macquarie

$1097

$52,167

2.10%

$1043

-$54

Lake Macquarie

$1178

$57,304

2.06%

$1146

-$32

Wollongong

$1183

$65,926

1.79%

$1318

$136

Tweed

$1335

$51,220

2.61%

$1024

-$311

# Source- ABS Household income 2011, Council rates data 2014/15

Table 7 - Rate comparison

Table 7 shows a 50% difference between residential rates at Shoalhaven compared to those of Tweed Council.  It also highlights that household income for the Shoalhaven is the lowest and that our rates as a percentage of household income are low compared to a number of councils.  If we looked bringing Shoalhaven’s rates up to the average for all Group 5 councils it would mean an increase of $215, which equates to a 24.3% increase in rates.

In addition to this, given the demographics of Shoalhaven City Council and the level of infrastructure in relation to the population in comparison terms, our level of rates should be above the average, given the higher number of pools, public halls, open space and road lengths to maintain.  A special rate variation submission is fundamental to improving future sustainability.  See table 8 below for some of these comparative measures, which have significant impact on the overall expenditure required to maintain the infrastructure, which should warrant higher rates than some other councils with less infrastructure:

Your Public Facilities

LGA

Group Average

Public Pools

12

11

Public Halls

27

24

Open Public Space

2019

1462

Total Road length (km)

1,707

1193.0

Road Length per ‘000 capita (metre)

18.3

11.2

Roads, Bridges and Footpath expenditure per capita ($)

272.32

250.05

Table 8 - Council Facilities

Further analysis was carried out on comparatives of Area of Council, income levels within Council and the rates being charged.  Figure 11 below shows the relationship for Area Size and taxable income, which shows the bigger the council area the lower average taxable income and the second chart Figure 12 shows a comparison of average rates to the % of rates to taxable income.  This shows the percentage for Shoalhaven at 1.76% of taxable income, the lowest in the group 

 

Figure 11 Council Area to Taxable Income

 

Figure 12 Avg Rates as % Taxable Income – based on 2013/14 OLG comparative data

 

Below Figure 13 shows  a snapshot of comparatives of rates with a 5%, 10%, 15%, 20% and 25% increase in Shoalhaven Councils rates, which still shows lower rates relative to all other councils in our Group and locally, except Eurobodalla.

Figure 13 - Rate increases

In terms of revenue these type increases would equate to the following in terms of total revenue dollars:

2017/18

$'000's

5% Inc

2950

10% Inc

5900

15% Inc

8850

20% Inc

11800

25% Inc

14750

 

5.2.2 Fees and Charges

In addition to rates, Council have the opportunity to review fees and charges, along with leases in an effort to increase the level of income generated from the delivery of services or hiring/leasing of properties.  As part of fee setting the philosophy of user pay should be high on the agenda.  The project team covering fees and charges have consultants currently reviewing fees and charges for opportunities to increase revenue or introduce new fees. A draft report from LKS Quaero on this analysis should be available by October 2016.

The number of Public Facilities, as summarised in Figure 14, obviously drives a certain cost structure and should be taken into consideration when reviewing increases to fees and charges, as well as rates.

A further consideration with the setting of fees and charges is how Council charge for the high influx of tourists around the summer period.  We currently see approximately 3.1 million tourists converging on the area within a short period of time and require infrastructure to cater for this influx.  Given that tourists do not pay rates in the Council area and benefit from heavily subsidised fees and charges we need to look at a mechanism to capture some revenue from this influx, perhaps by setting higher fees and charges all year round and subsidising for rate payers through yearly passes, regular hirer rates etc, ie a discount for ratepayers

Figure 14 - comparison of facilities

 

An additional way to bolster Council revenue is by promotion of these public facilities.  If council can bundle up a marketing campaign to sell the benefits of these facilities, they could attract events or conferences to the area and increase Tourism but also increase the returns on Local Council infrastructure.

5.2.3 Increases DA Fees and introduce value added services

An increase to DA charges has the ability to increase Council revenue, but at the same time it can hamper growth in the city.  There needs to be a balance between economic development and the amount of fees being charged and these charges will rise and fall with the inherent business cycle of economic activity.  These fees are also regulated by state government, so are not as easily increased as desired.  In order to increase DA fees outside this cycle Council would need to consider what else we have on offer to promote business and development in the area, ie by developing zoning policies that support business, by economic development and tourism working towards increasing tourism, investment etc. 

In addition to this Council should look into the introduction of Value add services to the community, including but not limited to Bush Fire assessments, pre-purchase inspections etc.  The issues of independence in DA approvals would certainly need to be covered off if a decision was made to go down this path.

5.2.4 Introduction of Parking fees

As traffic increases around the major centres and popular tourist areas, parking demand will increase and “user pay” parking will become a viable strategy to increase parking turnover.

5.3  Reduce Cost Structure – drive efficiency

There are a number of opportunities to improve the cost structure of Council. 

5.3.1 Continuous Improvement

Fundamental to cost reductions is the introduction to the concept of Lean or continuous improvement.  This is a philosophy which needs to be driven from the top of the organisation and filtered out to all levels within the organisation.  This takes commitment and dollars in terms of training and allowing time for teams to hold meetings to review processes and look for efficiencies.

Value streams are a good tool to link all horizontal processes that run across vertical organisational silos and removing wasteful activity that adds no value for the customer.  All staff would need their induction to include Lean and in-house learning programs would need to be introduced to educate staff to be able to work in projects teams.  Lean is also about changing culture to one where staff feel empowered, equipped and supported to improve their work as part of their everyday job.

Major areas impacted by customer calls would be an ideal starting point for review, and this could be incorporated with the introduction of the Customer Service Centre.  This would review outdated practices and better utilise technology to ultimately improve customer service and at the same time reduce costs.  The introduction of e-commerce will further reduce workload, introduce a one stop shop for customers and reduce reliance on high staffing levels.

The culture of service, teamwork and continuous improvement, needs to be a journey that continues forever and becomes a way of working, it needs to be inherent in everything we do by way of quality systems, process mapping and re-engineering.  The key point to make here is that a reduction in complexity will lead to reduced costs.

In 2015 Council approved a Continuous Improvement team within the organisation. This team is currently involved in a number of system implementations and then will focus on process reviews across the organisation.

5.3.2 Outsourcing

A second opportunity for cost reduction is to review service levels of internally provided functions and look at outsourcing those which are not competitive with outside providers.  Some of the areas which were reviewed in the last few years are the SEC, payroll, printing, audit and family day care to name a few of the TTF projects completed.  This process compared the services provided against the cost of providing these services and determined where benefits would be gained from outsourcing or alternatively what improvements could be made internally to reduce costs or improve service, an example of one change was the introduction of a time and attendance system for all timesheet employees which will result in improvements in Councils cost structure along with streamlined processed.

As an alternative to outsourcing Council could increase revenue by setting up a shared service function and taking on work of other councils.  This could lead to further economies of scale with reduced staffing requirements, particularly when system functionality is available to enable the best possible outcome for these processes.  This strategy is underway with the Illawarra Joint Organisation of Councils.

5.3.3 Use of Technology

The improved use of technology will also assist in other areas of council, particularly in the finance area, where significant gains can be made by elimination of duplication and improvements in reporting and automation of processes.  The implementation of new systems is instrumental in making these changes happen.  The current systems rely heavily on individuals to hold things together and to understand the history of systems.  This dependence on a few individuals leaves Council very vulnerable and does not allow for sharing of information, as people remain isolated from open and transparent information systems.

The integrated nature of an ERP system will help break down the silos in different work areas in council and should drive further reductions in staffing levels into the future, which should ultimately reduce costs.

The use of electronic commerce will further enhance customer service to the community and allow for self help portals which will drive further efficiencies.  Considerable work is required to ensure the technology delivers as promised, so Council will need to commit dedicated resources to achieve the desired outcome.

E-recruitment is another area where Council will be able to save significant money in terms of advertising for recruitment of new staff, the more this is done on line through search engines such as Seek and Linked In the less it will cost Council in paper media advertising. Phase 1 of this project has now been implemented.

5.3.4 Procurement

Another potential savings area is in procurement.  Currently we spend $99.3m on our top 100 suppliers, if we could save .5% of this spend it equates to $497k.  The current Illawarra Pilot Joint Organisation are looking at options for targeting savings and this should be driven more robustly to ensure savings are achieved, by prioritising big ticket items, such as motor vehicles, asphalt, energy etc.   A number of shared tenders have been raised in the last couple of years and all Councils in the Illawarra will continue to work together to find further synergies and savings.

5.3.5 Staff Changes and conditions of employment

The previous organisational changes rolled out a restructure by Group and Section, with $2.8m in savings having been achieved in salaries and wages.  The growing population, increases in building activity and related planning and assessment requirements and the requirement to continue to meet community needs will see the organisation needing to consider staffing/resourcing levels on an ongoing basis. 

5.3.6 Energy Management

In line with the sustainability of operations, Council should also be considering the use of solar power to further reduce operating costs, particularly with regard to big energy use sites.  Energy audits carried out in 2007 should be reviewed to see that the actions to reduce costs, energy consumption, green-house gas emissions and increasing management commitment have been responded to.

5.3.7 KPI Reporting

Monthly KPI’s should be introduced in line with the Strategic Plan, to measure performance, which will then aid in management and assist to drive improvements and cost savings.

Some KPI’s which could be introduced to monitor overall cost reductions are shown in Table 9 below, these need to be in line with Performance Management targets and compared to the IRIS survey results to determine if they will drive the desired community outcomes:

Strategy

KPI

Target

Revenue – Enhance Ratepayer Value, ongoing Services

Operating Profit/No of Ratepayers

Ø 0

Revenue – Enhance Ratepayer Value, Function

% uptake Formsport or BPAYview

Ø 10%

Revenue – Expand Revenue – New Services

Revenue Growth = increase in revenue/last years revenue as %

Ø 6%

Revenue – Expand Revenue – Brand – Shoalhaven area

Increase in economic activity

Ø 6.2% increase

Improve Cost Structure – Price

Procurement Savings

Ø $200k

Improve Cost Structure – Quality

Savings from Continuous Improvement efficiencies

Ø $200k

Improve Asset Utilisation – Availability

Percentage Preventative Maintenance/Total Maintenance Costs

Ø 80%

Improve Asset Utilisation – Selection

Life Cycle Costing completed on all new assets

Ø 80%

Customer  Satisfaction

Community Satisfaction Rating

Ø 90%

Innovation – No. of new services

No. of New Services

No of DA’s and turnaround time

Ø 2 per annum

Ø 1400 per annum

<     60 days

Improve Social Processes

Expenditure on community health and safety/Avg population

Ø $100 per capita

Deliver Products and Services

Reduction in Asset Backlog – Capex Expenditure/Depreciation

Ø 100%

Training

Avg Training Cost per FTE

Ø $750 per FTE

Software Upgrade Implementation

Modules go live dates meet plan

Within plan and budget

Leadership Training

Managers Trained

Ø 80%

Health and Wellbeing of Staff – Safety

LTI

Hours Lost/Total hours worked as a %

Table 9 Suggested KPI's

5.3.8 Joint Organisation

Council has undertaken collaborative discussions with Wollongong, Kiama and Shellharbour councils with a view to extend opportunities for joint regional partnerships.  A Joint Organisation has been formed and agreement to prioritise the following regional services:

·    Regional procurement tenders

·    Regional training opportunities

·    Shared internal services ie. Code of conduct

·    Asset Management service procurement eg fire safety, building maintenance, cleaning

·    Professional services

Work on a number of these services is continuing with the JO including Fleet and Energy tenders.

5.3.9 Better Management of Fringe Benefits Tax

There is potential to reduce Council’s Fringe Benefit Tax Liability by continuing to increase lease back fees year on year until the FBT cost of leaseback vehicles is negated. Some vehicles are now being fully recovered with further increases of 10% or $10 to go through this year on others.

5.3.10 Better Management of Leave Liabilities

Any leave liabilities Council has are automatically inflated each year when the award increases are applied.  One way to improve this situation is to ensure that all staff take their leave entitlements as they fall due and keep any amounts owing under award limits.  This does not save cash in terms of paying the leave, but does save in the cost of increasing provisions each year.  The cost of increasing the leave provisions each year is in the vicinity of $450k based on $16.3m of annual and long service leave provisions at the end of June 2016.

The changes to the Local Government Award in terms of Salary Sacrificing Long Service Leave over and above that set by the Act will also assist in reducing Long Service Leave entitlements and therefore reduce future exposure to wage increases if staff take up this option.

5.3.11 Reduced Service Levels

There are a number of services provided to the community which Council could consider reducing, such as partly funded special projects officers, operating Nowra Pool all year round etc.  Extensive Community consultation would be required as part of this strategy but could reap signification cost reductions if agreement could be reached.

5.3.12 Improved Fuel Efficiencies

Council operates a large fleet of vehicles, there may be some opportunity to reduce costs in this area.  The total Fuel cost for Council is $2m, just a 2% reduction would result in a saving of $40k.

5.4  Service Sustainability

There should be a full review of the services Council provide and questions posed as to

·    whether the service is broadly valued

·    does it align to the Long Term strategic direction of Council,

·    is Local government the right organisation to be providing the services,

·    what are the issues or risks with not providing the service and

·    if Council does not provide the service, who will?

Where it is not possible to withdraw from provision of critical services, it might be prudent to review the level of support provided to some services and look at cutting the level of service if feasible.  As an alternate to this a review of the delivery method may be possible, to look at other options for delivery eg are there some services we can deliver electronically as opposed to manually.

Other questions to ask are:

·    Are there additional or new income producing opportunities?

·    Is there unmet demand for the service, and if so how do we capture this demand?

·    Is there an ability or willingness to pay for services we might be providing for free or at a subsidised rate at present?

·    Are there growth areas where we are not providing services?

·    Does the continuing delivery of services, maintenance or renewal works programs remain a sustainable option, supported by operations, works and projects?

5.5  Asset Utilisation

The utilisation of assets in an organisation is a critical component of return on investment, along with driving customer satisfaction in terms of reliability, cost and function.  We know for Shoalhaven our assets are aging and our available funding is not sufficient to keep up with the current ongoing maintenance requirements, not to mention the backlog of infrastructure works required to bring our assets up to an acceptable level.  This backlog is estimated to be $10m, which has reduced significantly from the amounts set prior to Fit for the Future analysis. 

The decrease in CPI increase on Financial Assistance Grant Funding will lead to a further reduction in operating expenditure of $400k per year, which will impact considerably over the next 3 years totalling $1.2m.

Figure 15 below shows the current gap between revenue (less Capital Grants and Contributions) and expenses for 2016/17, ie approximately $14m, if we add to this the run rate of backlog of $10m this becomes a $24m gap, and if we further add to this the catch up for required maintenance this adds an additional $1m to expenses and widens the gap to $25m for the coming year.  Obviously this number is totally unsustainable, and requires some drastic measures to turn things around.

 

Figure 15 - Gap analysis

5.5.1 Only commit to Justified Renewal Projects

Council needs to review opportunities to slow down this rate of deterioration, and one way to do this is to only commit capital to renewal projects which have a cost benefit, ie the cost of the investment is recouped from the savings made in maintenance and other operational costs to keep the asset in working mode.

When decisions are being made, with regard to investment in new capital items, a full life cycle costing should be prepared.  This will ensure that the assets are not going to be an intergenerational burden on the community.  Asset Management Planning needs to encapsulate all phases of life cycle costing and forecast these costs into the Long Term Financial Plan.

5.5.2 Selling off Under-utilised Assets

Another serious consideration is to review ownership of assets surplus to needs or costing Council money, ie where the rental income does not cover the costs if commercially leased. This would result in a reduction in operational expenditure ie less maintenance, less overheads and reduction in depreciation etc.

Further to this Council should look at selling off any land surplus to needs, once again this would reduce operating costs to maintain the land and is in line with Lean principles to reduce redundant assets and drive costs down.

There are approximately 7 properties earmarked for sale, where due diligence is still required.  These properties have a combined market value of $6m in total, with differing rateability and potential for use.

5.5.3 Asset Rationalisation/Optimisation

In order to improve the Utilisation of assets, one needs to firstly look at the rationalisation of the existing asset base.  When reviews are carried out on the profitability of assets and the return on assets employed, those with negative operating results and with negative returns on assets should be reviewed to see if there are other similar assets nearby which could cater for the current levels of demand.  If this is the case there may be an opportunity to sell off duplicated facilities.  If there are no other similar facilities nearby then we should look at increasing the use of the existing facility. 

In the first instance we could look at promoting the facility to improve patronage.  Secondly Council should look at introducing new uses within the existing facility, this could be by introducing a gym to a pool complex or a café to a Library or a Visitor information centre to a Pool complex, similar to the arrangement at Ulladulla Civic Centre.

From financial analysis completed as part of the fees and charges TTF project team it was found that those facilities which were multi-use lost less money and had better returns on assets employed than those facilities with a single purpose.

An observation in this area is that Ulladulla Civic Centre operating budget did increase, but if like type facilities surrounding it were rationalised, the savings could more than offset this increase ie closing Milton library.

A further example of issues that can arise with the introduction of new or improved facilities is with the rebuilding of Nowra Pool.  Whilst it will improve the pool facility at Nowra, it leaves less funds for maintenance or improvement of Bomaderry pool, it will require more funding for amenities, it will be an intergenerational burden on council and the legacy will exist for many years to come, where a consolidated approach to improvements to the Bomaderry Aquatic Centre may have been a much more financially viable option longer term.

Below is a list of principles which should be followed when reviewing our current Asset base and any plans for future developments:

The Asset must be:

·    Fit for purpose – does it meet the needs of the service?

·    Fit for use – is it in an acceptable condition?

·    Fit for the future – will the asset meet future needs of the service?

 

Core Principles

 

·    Is there a need for the asset, is the asset still providing a required service to the community.  Is the service provision what the customers expect?

·    Is there a more cost effective way to provide that service?

·    If an asset is underutilised, then prior to any decisions to construct another similar asset, the potential for using the existing under-utilised asset, should be considered.  What does demand forecasting look like?

·    Where an asset is under-utilised or under-performing, an assessment must be made about continuing to fund the asset.

·    Any rationalisations should be undertaken within the IPR framework that takes account of service delivery needs, corporate objectives, financial and budgetary constraints and the Council’s overall resource allocation objectives.

·    Are there alternate methods of service delivery through other Council facilities, providers and levels of government or the private sector or regional opportunities?

·    Are there disposal options including transfer for alternative use, rental, sale and/or leaseback, and demolition should be considered when reviewing acquisition plans.

·    Does the asset have high operational costs with little income producing opportunity, if so a review of similar assets close by should be carried out before any further monies are sunk into the existing asset?

 

5.5.4 Pensioner Rates Deferral

This policy was reviewed during the last term of Council, bringing payment terms in line with other rate payers. Council. This has contributed to improved cash collections by over $3.3m year on year, which the change to this policy has aided the improvement.

5.6  Review Capacity to borrow

There is no right or wrong level of debt, but it must be able to be supported by the income Council generates and the cash flows which result.

Whilst it has historically been prudent to keep debt levels as low as possible, borrowing is a valid way to finance ongoing infrastructure requirements.  Deferral of infrastructure replacement/ maintenance is often more detrimental to the long term capabilities of council then borrowing to finance such renewal or replacement spending.  The spending may be justified now due to greater cost in the future of deferring this activity.

Generally however, a council with an operating deficit would find it difficult to justify the additional debt, unless there is a cost benefit of replacing assets over the cost of maintaining these assets.

Council is forecasting operating deficits for 7 of the next 10 years and should never consider funding this deficit with debt, other means need to be sought out to raise the level of additional funding required.  Council should only borrow to fund activities or developments which are core to council’s activities and agreed priorities.  Each request for funding should be supported by a cost benefit analysis, showing whole of life cost of the investment.

The most recent loans drawn down were taken out at 2.74% through TCorp for Jerberra Infrastructure work and 3.24% for other council requirements.

A snapshot of our Debt Service Ratio for the next ten years is shown in Figure 16 below:

 

Figure 16 - Debt Service Ratio

As can be seen our debt service ratio is well below the guidelines set of below 20%, also industry norms suggest that for non-growing Councils the debt service ratio should remain below 10%.  Council is well within these guidelines but it is one area where Council need to consider further borrowings for New and Growth assets, especially given the very low interest rates at present.

Given the fact that Council expenses are in excess of overall operating income by a considerable amount year on year, Council would find it difficult to justify taking out additional loans unless the interest repayments are less than the cost of maintaining the existing asset requiring renewal.  Further to this the term of debt funding should never exceed the life of the asset it is used to fund.

The important consideration to address with further debt funding, is full cost/benefit analysis to ensure that there are financial gains to be had by Council in borrowing additional funds.

Below is a list of core principles to follow when decisions are being made with regard to loan funding:

·    NEVER borrow to fund operating deficits

·    Only borrow to fund activities core to Councils agreed priorities (ie they must be in the Long Term Financial Plan) unless under circumstances of emergency

·    Each funding request needs to be supported by full life cycle costing analysis

·    Only fund to borrow if interest repayments are less than the cost of maintaining the existing asset requiring renewal

·    The term of debt funding should never exceed the life of the asset it is used to fund

·    The specific capital project should only be considered for loan funding, if it is to be beneficial to the majority of ratepayers.

·    Debt servicing cost should not exceed 2% of annual general income.

·    Loans should not be taken out over more than 20 years

·    All loans should be taken out in accordance with relevant statutory requirements as contained in the Local Government Act (1993) and the Local Government (General) Regulations 2005.

·    Three written quotes should always be sought or a loan tender called

·    No borrowing from any source outside the Commonwealth of Australia nor in any currency other than Australian currency

 

5.7 Cultural change

An observation is that there while there has been an increased sense of urgency within Council more still needs to be done to address the financial situation.  Legislation and bureaucracy can slow things down however the organisation must continually make efforts to break through these issues.  The other barriers to progress relate to out of date systems which rely heavily on human intervention on an individual basis, which gives great power to some individuals and excludes others from taking ownership.  This is being addressed in the renewal of a large number of Council’s systems. 

Even though Council is a Local Government Authority and we are guided by legislation and at times bureaucracy we need to treat council like a business not a government agency, we need to get lean and keen.

In order to achieve “lean and keen” Council needs to make a cultural shift, from “this is the way we do things here” to “how can we do things better?” Council has recently established a Business Improvement Unit which will utilise the Lean model to drive efficiency improvements across the organisation. 

This change is being driven from the top, with the four main principles being:

·    Satisfy your customers – internal and external

·    Continually improve through small steps – its evolutionary and ongoing

·    Involve everyone in improvement – it will only work if everyone is on board

·    Control processes through measurement and KPI’s- which are displayed for all

A cultural change such as this can save an organisation considerable time and money and improve customer service.  Investment in staffing, training and systems is being made to ensure the organisation can meet this challenge.

5.8 Increase Renewal Expenditure

In order to achieve some of the Fit for the Future Ratios, Council’s submission highlighted the need to increase Renewal Expenditure over a period of time as shown below:

·    2016/17 $1,919,267

·    2017/18 $4,026,523

·    2018/19 $5,544,174

·    2019/20 $2,660,522

·    2020/21 $2,392,427

·    2021/22 $2,649,376

·    2022/23 $2,986,863

·    2023/24 $2,834,299

·    2024/25 $3,191,979

 

These figures have been reviewed as part of the Long Term Financial Plan review and are summarised below:

 

·    2017/18 - $1,500,000

·    2018/19 - $4,6,87,917

·    2019/20 - $4,6,94,232

·    2020/21 - $4,238,077

·    2021/22 - $4,637,347

·    2022/23 - $4,223,718

·    2023/24 - $4,650,482

·    2024/25 - $ 2,433,989

·    2025/26 - $3,259,180

5.9 Increase Maintenance Expenditure

In order to achieve some of the Fit for the Future Ratios, Council also highlighted the need to increase expenditure on maintenance over a period of time, as shown below:

·    2017/18 - $0

·    2018/19 - $700,000

·    2019/20 - $730,000

·    2020/21 - $1,400,000

·    2021/22 - $1,500,000

·    2022/23 - $1,530,000

·    2023/24 - $2,060,900

·    2024/25 - $2,092,727

These expenses have been reviewed as part of the Long Term Planning process and these figures have now been included as follows. Adjustments have been made to assist with achieving the operating result benchmark required:

·    2018/19 - $0

·    2019/20 - $0

·    2020/21 - $1,050,625

·    2021/22 - $1,076,891

·    2022/23 - $1,103,813

·    2023/24 - $1,131,408

·    2024/25 - $1,159,693

·    2025/26 - $1,188,686

 

5.9 Other Non financial improvements

There are a number of non-financial improvements which should ultimately improvement the overall efficiency and effectiveness of Council.  These strategies are covered below:

5.9.1 Leadership Development

This program intends to develop leadership capability within Council to ensure constructive and consistent leadership across the organisation.

5.9.2 Business Planning

The development of a business planning model which aligns to the strategic plan and annual operational plan will develop accountabilities within the organisation and more meaningful goals with milestones and performance indicators.

5.9.3 Staff Climate Survey

The aim is to undertake a bi-annual staff climate survey to identify the key corporate priorities to be incorporated into Council operations, by way of localised action plans for cultural improvement.  The survey will also establish a base line against which progress on improving organisational culture can be measured every two years.  This should ultimately result in improved efficiency and service delivery.

5.9.4 Project Management Methodology

The development of a project planning and management methodology for management of both capital and non-capital projects, consistently applied across the organisation will result in improved project management and project cost structures.

5.9.5 Capital Works Carry-overs

Council has also reviewed the effectiveness of project planning in order to improve the management of capital expenditure and more efficient use of money and resources.

5.9.6 Customer Service – One stop shop

The development of a one-stop approach to customer service and the establishment of a call centre to answer 80% of all queries at the first point of call, should improve efficiencies and improve the overall customer service experience.

5.9.7 Branding and Marketing

A complete review of Council’s branding and marketing has been carried out, so that there is a centralised “whole of organisation approach” to Council’s image, identity and brand across all services and associated logos, publications and communications, with marketing appropriately targeted at the right demographic, resulting in scrutiny of Councils printing expenditure and where possible reductions made.

6.    Risks

Council has considerable risks facing them into the future on top of the main financial risk of replacing and maintaining our current asset base to the level required.  The following risk factors have been taken into consideration in our Long Term Financial Plan:

·    Reduction in CPI on Financial Assistance Grant – with a negative financial impact of $1.2m over the next 3 years

·    The Adaptation Plan covers off Climate Change, and the impact on our operating plans.

·    Interest Rate Risk – given falling interest rates Council has factored in reduce interest income, however if rates continue to fall, there may be some exposure in the longer term.

In addition to these risk factors which have been taken into consideration for future financial plans there are a number of areas where no changes have been factored into the Long Term Plan.  These areas have been considered but without detailed information it is difficult to include in these plans:

·    Increase in services such as Ulladulla Civic Centre,  CCTV and other new assets and the long term financial burden from some of these

·    Climate Change, in terms of future energy prices, as well as the impact of waste energy.  Also in terms of investing more in solar installations for energy, these are unknown until specific projects are considered in terms of the upfront capital cost and then ultimately the savings achieved.

·    For the majority of our financial forecasts we have continued to use a 2.5% increase for expenses year on year.  This is not reflective of reality and does not review our cost structure year on year to understand if the increase is required or is adequate. .  For rates we have tended to see that increases approved by IPART have not been consistent with the CPI and for expenses, where specific increases are unknown at this time

·    Our approach to interest rates has been kept very deliberately conservative.  But with the appointment of an investment advisor we are finding that by extending our deposit terms we are slowly improving the interest rates achieved.  But the major risk in this area is that our returns are being eroded by the overall reduction in rates, which we are trying to abate for as long as possible.  Alternately interest rates on borrowings are coming down but are always at the mercy of the Reserve bank and the major banks.  The one positive on the horizon is that  T Corp have offered some very low interest rate loans for Infrastructure projects, which are reflected in $7.2m of loans for 2016/17 onwards. The impact of a .5% decrease in borrowing interest rates on a $10m loan is approximately $300k over a 10 year period.

·    The impact on the AUD rate of a 15% reduction in exchange rate would mean that imported costs would increase and therefore drive increases in major commodities such as oil, asphalt etc.  The assumption is that the AUD will remain at the existing level ie .75 to USD and this needs to be addressed with closer scrutiny of the impact.

·    The level of restricted assets continues to increase thereby limiting funds available for General Council spend.  Some of this funding is from Section 94 contributions where developers provide for future infrastructure as part of their Development consents.  These contributions only cover the actual cost of the infrastructure, and not ongoing maintenance and renewal costs, so in the short term we see a positive income effect, but longer term we start seeing an ever increasing liability. In some instances where there has been a Section 94 contribution Council has a requirement to match that funding, this fund matching obviously has an impact on Councils cash flow and needs to be considered in the future plans of council, so timing and spend will need to be determined.  To enable this, Council needs a clear plan around infrastructure requirements. At present the total exposure to council is in the vicinity of $116m.  Council is also currently undertaking a full review of social infrastructure requirements, in an effort to clearly define the requirements and to align this plan to the Section 94 monies currently held.  This review may assist to bring into line funding requirements with available funding.  Along with this a Contributions Panel is being established to review all Section 94 funding, programs, projects etc.

·    Unfunded liabilities also pose an additional threat on Councils future financial sustainability.  Currently there are contingent liabilities in the following areas:

Gasworks remediation and subsequent costs in relation to this work -, with remediation works yet to be assessed.

Asbestos issues at 180 (Asset Management Plan 2008) properties with a cost to clean up estimated at $4.2m.  This figure does not include asbestos removal at Shoalwater or Holiday Haven sites.

Leave entitlements provision where only 33% of the liability is funded by the reserve -with an overall difference of $17m still to be funded.

As mentioned above Section 94 contribution exposures could culminate in a council liability in the vicinity of $115m, currently we hold $26m for this purpose in restricted assets, therefore leaving $89m unfunded.  A review of the entire Section 94 Plan is currently being undertaken.

7.    Evaluation

 

Reporting will play a major part in evaluating the success of this strategic direction.  Council needs to put in place or improve transparency of reporting in a number of areas:

·    Monthly financial reporting to show progress against plan

·    Monthly KPI Indicators – showing progress against the major areas in the strategic plan

·    The LTFP needs to be guided by the strategies put in place and the overarching programs Council is aiming to achieve.

·    Returns on investments will continue to be reported monthly through the investment report.

·    Reporting on restricted assets will continue as part of the Monthly investment report

·    Reporting of actuals against targeted savings plans

 

Figure 17 below shows the movement from forecast deficit to the revised operating surplus as a result of the implementation of the above savings plan and revenue strategy, this will need to be charted to ensure if actions are in alignment with our plans.

Figure 17 - Operating Result Scenarios

One thing to note from the above chart, the operating result before capital Grants increases to $13m, however the investment in Asset renewal at the same time may need to utilise this additional cash to increase spend towards achieving the infrastructure renewal ratio, which still only achieves a result of 60.8%, meaning more funds are actually required to meet the OLG FFTF benchmark of 100% for this ratio.

8.    Recommendations

The following recommendations are proposed to ensure a way forward to a sustainable financial future for Council:

·    Start Community dialogue immediately around a rate increase in the vicinity of 27% over 2 years, (including rate peg of 2% each year)

·    Review fee structures including discounts to rate payers.

·    Introduce continuous improvement principles throughout Council, including addressing the culture

·    Market testing where practical and where it supports financial sustainability principles

·    Optimisation of the use of technology to enable reengineered processes

·    Introduce procurement savings targets

·    Review conditions of employment eg spread of hours

·    Investigate energy management initiatives

·    Rationalise assets where possible – consolidate facilities, better utilisation of facilities and sell off of surplus assets

·    Cut services to reduce costs

·    Improve debtor management

·    Continue to implement the non-financial initiatives

·    Add the following checklist to all Council reports for Capital Funding requests:

a.   Is it work required for statutory purposes

b.   Is it to address emergency situations

c.   Is it to eliminate hazards or eliminate risks

d.   Is it to meet contractual obligations

e.   Is it to perform necessary renovations or repairs (which will reduce ongoing operating expense)

f.    Is it to replace equipment

g.   Is it funded by state or federal government departments

h.   Is it a continuation of an existing project which cannot be deferred

i.    Is it to satisfy a community need or provide an improved level of customer service