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Addendum Agenda - Ordinary
Meeting – Tuesday 26 September 2017
Page
11
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CL17.272 Pathways
to financial sustainability
HPERM Ref: D17/308897
Group: Finance
Corporate & Community Services Group
Section: Finance
Attachments:
1. Budget cut and
revenue options ⇩
2. New
capital works ⇩
3.
Councillor Presentation: Resources Issues (under separate cover) ⇨
Purpose / Summary
To review and determine
Council’s financial sustainability strategy (FSS) in light of the IPART
decision to only part approve Council’s SRV application.
Council’s FSS must meet
the OLG FFTF benchmarks.
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Recommendation
That Council
adopt Option 1 which will retain existing services, allow modest
“new” asset spend, move towards meeting all FFTF benchmarks and
stage the further rate increase required over the next three years.
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Options
1. That Council prepare a revised DP/OP
to reflect the proposed SRV application, under S508A of the Local Government
Act 1993, to retain the 13.2% special variation approved as a one-off increase
in 2017/18 as a permanent increase and for additional special variations
(inclusive of a rate peg of 2.5% pa) of 5% in 2018/19, 5% in 2019/20 and 5% in
2020/21. (This is the recommended option)
Implications: Council will have
the capacity to adequately maintain, renew and replace Council assets and meet
community service expectations. While the application to IPART is for a
multi-year special variation, Council is able to adopt lesser rate increases
each year according to prevailing conditions. Council acknowledges there
will be an impact on ratepayers and will continue to assist members of the
community who experience hardship. Staff will need to revise the Delivery
Program, Operational Plan and Long Term Financial Plan in line with the adopted
recommendations and report back to an extra-ordinary meeting of council for
endorsement prior to public exhibition.
2. Council chooses cost-cutting (service
reductions) and/or revenue raising options from the lists attached to this
report together with a lesser SRV (if needed) in order to achieve
Council’s performance benchmarks
Implications: Each $600K
improvement to Council’s Operating result is roughly equivalent to a 1%
rate increase. Council will need to consider a target for significant
service level adjustments (not related to infrastructure maintenance or
renewal) to maintain a pathway to financial sustainability. Reducing
service levels, in consultation with the community, can manage part of the
funding gap; however, it is likely that Council will continue to operate with
an annual deficit without some form of SRV.
3. Council adopts SRV levels that will
allow it to meet the asset renewal target of 100% by 2026/27 – this
requires rate increases to lock in the current 13.2% increase plus addition of
5% p.a. for the next seven years followed by a 3.4% increase in 2025/26.
Implications:
This is the optimum level for asset management but is likely to attract
substantial public objection because of the higher rate increase required.
4. Council does not adopt the recommendation
(“do nothing”)
Implications: This would be a
financially irresponsible pathway. Council will not meet its operating
performance ratio target over the planning horizon and there will be a
deterioration in the asset renewal ratio. The average cash deficit over
the period amounts to $2.8M pa. which will quickly deplete council cash
reserves. The Operating Deficit starts at $9.2M in 2018/19 and reduces over
time to an average of $3.8M over the planned period. Any decision that
does not meet the Fit for the Future targets increases the risk of some form of
Ministerial direction and discussions would need to be held with the Office of
Local Government to understand the implications.
Background
In February 2017, Council applied to IPART for 13.2%
and 14% general rates income increases for 2017/18 and 2018/19, including known
and projected rate pegs, to fund new infrastructure investment, reduce
infrastructure backlog and improve financial sustainability. Of the
2017/18 proposed increase, 0.2% was to enable Council to take out a loan of $2M
for development of road infrastructure for Verons Estate. IPART approved
a one-year temporary increase of 13.2% for 2017/18 in May 2017. The one
year approval was given as IPART determined Council had not updated and
advertised its Integrated Planning & Reporting documents for its special
variation proposal. In its determination, IPART commented “Overall,
we consider on balance the community was adequately consulted, despite the
IP&R documentation not discussing the full extent of the rate rise.”
As part of the Councillor Budget Workshop held on 31
August 2017, a number of cost cutting and revenue raising initiatives were
discussed. This report provides:
· a number of cost
cutting and revenue options for consideration
· further details
about one of the Long Term Financial Plan scenarios presented at the Workshop
to allow Council to adopt a position on its revenue roadmap over the planning
horizon.
However, it is up to Council to determine its funding
priorities. At the Councillor Budget Workshop, options were discussed to
reduce costs by adjusting service delivery and increase revenue through
additional fees and charges. If adopted, the impact of these changes was
estimated to be $600,000 pa, leaving a funding gap of, approximately, $11.2M
pa, once expected increases to electricity charges and operational costs
associated with the Shoalhaven Indoor Sports Centre are factored into
Council’s Base Case scenario from 2019. While continuation of the
2017/18 special variation as a permanent increase reduces the funding gap to
$4.1M pa, it does not allow Council to adequately address asset renewal
requirements over the 10 year planning horizon - as can be seen in the
following chart:
The operating performance ratio exceeds the target of 0% by 2021/22, a
year later than required under Fit for the Future. The asset maintenance
target is 100% and Council moves toward this target over the planning
horizon. An average of $15.5M pa over the planning horizon is needed to bring
the Building and Infrastructure Asset Renewal Ratio up to the benchmark level
of 100%, all other things being equal.
The Base Case contrasts strongly with a scenario where
the 13.2% increase is not retained as a permanent increase to Council’s
rate base:
In this case, Council will not meet its operating
performance ratio target over the planning horizon and there is a deterioration
in the asset renewal ratio.
While this report recommends applying for further
special variation increases over the next three years, a list of cost-cutting
measures and other revenue raising initiatives is presented in this report for
Council’s consideration.
Cost Reduction and Revenue
Increase Actions
There are several actions that would reduce the
reliance on a SRV.
1. Operational service reductions
and revenue opportunities: These are identified at Attachment 1. Option 2
(in Options) requests Council to consider cuts to operational budgets and
increases in revenue to reduce the need for rate rises. Council could
identify a number of cost reductions and revenue increases from this
attachment, however there are some serious outcomes that would arise,
particularly relating to reduced services, increased complaints and
delays. Each $600,000 identified will decrease the need for a rate rise
by approximately 1% and improve the Operating Performance Ratio.
However, benchmarking from the LG
Professionals and PwC report, ‘Local government operational and
management effectiveness report’, Office of Local Government comparative
data and a range of internal indicators, indicate that:
a. Total
administration costs as a percentage of operating costs; and
b. Staffing
levels in corporate services (finance, customer services, IT & HR) and DA
assessment
are
already below industry levels, i.e., staff levels should actually increase in
some areas to meet workloads and community expectations (see section on
Resourcing Issues below).
Further
reductions would lead to staff dissatisfaction and increased turnover, adding
costs for recruitments, reduced productivity and increased absenteeism.
2. Reduce capital expenditure by
removing new, unfunded asset works, including any budgets to produce
masterplans, complete detailed design works and the like. A list of such
works is in Attachment 2 and savings (cuts) up to $750K may be possible. Again,
there are serious implications and community expectations will not be
met. By reducing CAPEX for “new works”, such as new community
pathways etc., it will free up funds for renewal and maintenance works or
simply improve the cash deficit position.
3. Target further operational
productivity improvements. The LTFP includes a salary savings target of
$233,900 in the 2017/18 budget and this is escalated over the forward years in
line with projected award increases. The salary savings target could be
increased to, say, $500,000. To achieve this target requires a deliberate delay
in replacing/recruitments when a vacancy occurs. This results in a loss
of capacity to undertake works, more pressure on other staff members and
potential for service complaints. In addition, savings in non-salary
items (materials and contracts and other expenses) expenditures are budgeted at
the rate peg and below CPI. For the 2016/17 budget, this was quantified
at $1.8M in savings. Substantial “productivity” savings were
also factored into the 2014/15 and 2015/16 budgets as part of the
Transformation Program and further reductions will have a real impact on
operations.
4. Procurement savings. Continue
to budget for savings from procurement. The estimated savings for 2017/18 is
$60K.
There are diminishing returns from tendering activities as
fewer existing contracts are available to be market tested or negotiated as
part of the Illawarra Shoalhaven Joint Organisation (ISJO), together with
Council’s existing use of large panel arrangements. Favourable
price reductions may not be achieved due to changes in exchange rate, utility
costs, interest rate rises, etc.
5. Reduce fees paid to
Councillors. Council currently pays the maximum fees allowable for the
Regional Rural category ($19,310 pa) but could pay a lesser fee (the lowest fee
in the approved range is $8,750 pa) – overall a potential saving of
$94,440. In addition, Council could reduce the travel “mileage”
rate allowance to the same level as the LG Award or ATO rate, as the current
rate is above these.
However, it is arguable that Councillors are not paid enough
in recognition of their workload now, so any reduction would make it more
difficult to attract quality Councillor candidates at the next election and
existing Councillors are less motivated to work as hard.
6. In major corporate cost
reduction programs other measures have included:
a. Salary
& wage freeze – this is not possible under the existing Award
provisions;
b. New technology – contract negotiations are almost
complete with Tech 1 to commence implementation of new systems which will have
a two year completion time frame;
c. Sell underperforming assets – the Ross Report
highlights some opportunities however this will be an involved community
engagement process and early indications have not been supportive;
Resourcing Issues
At a Councillor Briefing (as
part of the senior staff contractual matters committee meeting) on 24 August
2017 (Attachment 3), a number of resource challenges for Council were
identified:
· Increasing
community expectations
· Workload
from a growing local economy and increased development
· Ageing
workforce
· Competitiveness
- ability to attract and retain the right people
· Performance
against service delivery benchmarks
The Briefing identified
approximately $3.8M of ongoing resourcing needs. However, only $2M of
additional expenditure (approx. 50% of needs), phased over two years, is
included in the financial modelling over the planning horizon.
Revenue Options
At the Budget Workshop on 31st
August, three options were explored to increase revenue:
1. Apply
“user pays” principle to a broader range of services provided by
Council; for example, paid parking during peak periods, fees and charges for
the use of sports grounds, spectator fee to access swim and fitness
facilities. The attachment contains further details about the last two
possibilities. Paid parking requires the development of a business case
to ensure that benefits will be greater than the lifecycle cost.
2. Make
a special levy.
The option of an Infrastructure Levy was raised at the
Budget Workshop to address the asset renewal shortfall.
It is noted that a fixed annual charge, under section 501
of the Local Government Act 1993, can only be levied for purposes specified in
the Act and those prescribed by regulation. Under the Act, Council may
impose annual charges only for water, sewerage, drainage and waste
services. Therefore, a levy can only be made and levied legally as either
ad valorem, ad valorem with a base amount or ad valorem and a minimum amount,
and is indistinguishable from making a special rate. A portion of the
special levy that was discussed has been included in the proposed rate increase
for 2018/19 (+1%).
3. Make
a Special Rate
To limit the impact on the community, address some of the
resourcing issues at Council and progress toward the benchmarks for the three
key Fit for the Future indicators (operating performance ratio; building and
infrastructure asset renewal ratio; maintenance ratio), the following
multi-year special variations are proposed:
· 5%
rate increase (including the rate peg of 2.5%) in 2018/19
· 5%
rate increase(including the rate peg of 2.5%) in 2019/20
· 5%
rate increase(including the rate peg of 2.5%) in 2020/21
This means that there will be a cumulative increase of 15.8%
over the 2017/18 rate base (assuming the 13.2% special variation is retained as
a permanent increase), which is 4% lower than council’s original 14% SRV
for 2018/19. The increase will, however, allow Council to meet its Fit
for the Future targets but at a slower rate.
The chart shows the projected impact on the key financial
indicators of this proposal:
To achieve the asset renewal target of 100% by 2026/27,
requires rate increases of 5% pa for the next seven years followed by a 3.4%
increase in 2025/26.
Community Engagement
Community engagement in relation
to proposed special variations has been ongoing since November 2016. If
the recommendations in this Report are adopted by Council, a revised Delivery
Program and Operational Plan, containing an additional chapter detailing the
revisions, together with an updated Long Term Financial Plan, needs to be
prepared for Council to adopt by mid-October 2017.
The community will, then, have
an opportunity to make submissions to Council regarding the setting of rates
for 2018/19 onward as part of the public exhibition of the revised Delivery
Program and Operation Plan 2017/18 in October and November 2017. A report
would be prepared for Council by the end of November 2017 and, if adopted,
would allow Council to notify IPART of its intentions to lodge a special
variations application in December 2017. Council would then need to make
the formal application in February 2018.
The draft DPOP and related
documents will be presented to Council in March 2018 and then placed on
exhibition for 28 days. It is planned that Council will need to adopt the
final DPOP/budget in June 2018. IPART are likely to announce its
determination sometime in May 2018.
Financial Implications
While some cost-cutting options
are possible, many require balancing service delivery levels with community
expectations. Irrespective of the cost-cutting options adopted by
Council, there will remain a funding gap that needs to be addressed by:
· Applying
to IPART to have the one-off increase allowed in 2017/18 as a permanent rate
increase. This reduces the funding gap from $11.2M pa to $4.1M pa
· Pursuing
other revenue initiatives to allow Council to better meet the community’s
asset and infrastructure expectations, address some of the resourcing issues at
Council and progress toward the benchmarks for the three key Fit for the Future
indicators (operating performance ratio; building and infrastructure asset renewal
ratio; maintenance ratio).
Should the recommended option of
additional special variations (inclusive of a rate peg of 2.5%) of 5% over the
next three financial years not be adopted, then other ways of bridging the
funding gap will need to be determined.
Risk Implications
There are substantial risks to
the financial sustainability of Council, if the existing and proposed special
variations are not approved as a permanent increase or Council declines
to identify how it can make budget (service) cuts or raise extra revenue. These
options are set out in Attachments 1 and 2. It would have a significant
detrimental impact on service levels.
If council continues a pathway
of underfunding the identified asset renewal works than the risk of asset
failure, inability to repair defects, or likelihood of more liability/accident
claims will increase.
If
Council choses the “do nothing” option, then the likely
intervention from OLG, at some stage in the future, would increase.
