Progress on NSW Local Govt. Sustainability since the 2006 Inquiry National L.G. Asset Management and...

Progress on NSW Local Govt. Sustainability since the 2006 Inquiry

National L.G. Asset Management and Public Works Engineering Conference, Melbourne, May 12th 2010

© Professor Percy Allan AM

Research Director

Review Today Pty Ltd

18/04/232

Local Government Inquiry

In September 2005 the LGSA (NSW) appointed an independent 3 person panel to review the future sustainability of NSW local government.

The Panel’s chair and research director was Prof. Percy Allan, a public finance adviser who had previously been Secretary, NSW Treasury (1985-94) and Finance Director, The Boral Group (1994-96).

18/04/233

Local Government Inquiry

The Local Government Inquiry completed its 2 volume (1000 pages) report in May 2006.

Subsequently Prof. Allan with Mr. Bob Gaussen (Mediate Today) formed a consulting consortium (with AE and GHD) to undertake sustainability reviews of individual councils.

So far Newcastle, Albury, Wollongong and Great Lakes, Greater Taree, Armidale, Dubbo and Coffs Harbour councils have used its services to review their long term sustainability.

18/04/234

Local Government Infrastructure

Findings– The public wanted more attention given to local

roads, pavements and kerbing. (IRIS Research opinion poll). Upgrading the environment and the appearance of public areas also rated highly.

– Overall underspending on infrastructure renewal had been of the order of $500 million per annum.

– It would cost over $6.3 billion to restore these assets to a satisfactory condition.

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Local Government Infrastructure

Findings– A further $14.6 billion was needed to replace existing

assets over the next 15 years. This did not take account of new infrastructure needs for a growing and shifting population.

– Only one in five councils were managing infrastructure risk via asset or risk management plans. As assets deteriorated, councils risk exposure was increasing.

- Most councils significantly understated their depreciation rates because they had not updated the fair value of their assets since accrual accounting was introduced in the mid 1990s.

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Local Government Services

Findings– Only a small proportion of councils had undertaken

long term assessments and planning of their community’s service needs.

– Most councils did not prioritise beyond 3 years (management plan) or budget beyond 1 year.

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Local Government Finances

Findings– The balance sheets of most councils were

exceptionally strong, displaying very low levels of indebtedness to other sectors of the economy.

– On average, the net financial liability of councils was little more than 2% of their total assets. Only a handful of councils exceeded 10%. This compared with 25% for the NSW Government and over 50% for PPP infrastructure operators.

18/04/238


Findings– By contrast, the operating statement of most

councils was heavily in deficit. – Excluding commercial utilities (e.g. water and

sewerage) councils* on average ran an operating deficit of almost 5% of their total own-source revenues. Over 20% ran operating deficits in excess of 20%.

* After adjustment of depreciation of physical assets at fair value

18/04/239


-60%

-40%

-20%

0%

20%

40%

* Council operating deficits/surpluses to total own source revenues

Council Operating Balance Ratios*

18/04/2310


Findings– Councils’ operating deficits were largely funded by

running a surplus on capital account rather than resorting to borrowings. This meant capital contributions, capital grants and proceeds of asset sales were mainly used to prop up operating costs rather than undertake capital renewals and enhancements.

– For one in four councils the long-term outlook was particularly bleak. Without substantial rate increases and/or disruptive expenditure cuts, they were financially unsustainable.

Define Councils’ Role

Review Today Pty Ltd11

LGIRecommend

LGSA Support

GoodProgress

Partial Progress

Little-No Progress

Policy Initiative

1. Constitutional Recognition

Yes X ALGA –C/w Agreement

2. Inter-Govt Agreement

Yes X NSW Opposition Committed

3. Annual Cost Shifting Survey

Yes X LGSA annual survey

4. Red Tape Review

Yes X

18/04/2312

Renew Infrastructure

LGI Rec: Restrain ServicesAll councils with an infrastructure renewal gap and backlog voluntarily agree to restrain operating expenditure by adopting an ‘optimalist’ approach to new recurrent services until their physical assets are restored to a satisfactory condition. This would involve devoting the bulk of future real growth in council total revenues to renewing and enhancing local infrastructure, especially roads, kerbing, pavements and bridges, until the renewal gap and backlog was overcome.

18/04/2313

LGI Proposals: Renew Infrastructure

LGI Rec: Infrastructure Funding Strategy:To minimise the impact on council rates, fees and charges of overcoming the $6.3 billion infrastructure backlog and closing the $0.5 billion annual infrastructure renewals gap, the Inquiry proposed local government:

– Borrow $5,300 million to overcome the infrastructure backlog (other than that in water and sewerage which DEUS insists can be funded with existing charges). This would generate about $400 million in debt charges (interest and principal repayments) annually;

– Raise an extra $900 million per annum in revenue to both close the renewals gap ($500 million) and meet the new debt charges ($400 million); and

– Derive the extra $900 million by seeking $200 million in extra C/w and State grants, $200 million in council expenditure savings and $500 million from a one-off 13% increase in rates, fees and charges.

18/04/2314

LGI Proposals: Renew Infrastructure

LGI Rec: Infrastructure Management The State Government provide financial incentives and technical assistance to enable all councils within three years to adopt a total asset management (TAM) system with consistent asset accounting practices.

LGI Rec: Regional RoadsThe NSW Government assume responsibility for all regional roads in rural shires since such councils do not have the financial capacity and asset management systems to maintain and renew them. This would cost about $45 million a year and be part of the State’s increased grants effort.



LGIRecommend

LGSA Support

GoodProgress

Partial Progress

Little-No Progress

Policy Initiative

5. Operating Gowth Cap

No X

6. Introduce Asset Mgt Systems

Yes X DLG/ IPWEA Guidelines

7. C/w/ State Backlog Funding Grants

Yes (ip) X C/w RLCIF of $1 Billion



LGIRecommend

LGSA Support

GoodProgress

Partial Progress

Little-No Progress

Policy Initiative

8.Depreciation Fully Funded

Deferred X DLG Depreciation/ Renewal Index

9.State takeover of Regional Shire Roads

Yes (ip), but only

where no funding is provided

X

Prioritise Services


LGIRecommend

LGSA Suppor

t

GoodProgress

Partial Progress

No Progress

Policy Initiative

10. Opinion Surveys

Yes X DLG Engage Strategy

11. Services Plan

Yes X DLG Delivery Plan

12. Joint Purchasing

Yes X LGSA permit from DLG & Shared Service Centres (e.g. Hunter Councils)

Prioritise Services


LGIRecommend

LGSA Suppor

t

GoodProgress

Partial Progress

No Progress

Policy Initiative

13.ResourceEnhancements

Yes X Parking meters

14. Business Commercialis-ation

Yes X Water Utility Guidelines

State and Local Land Use Planning


LGIRecommend

LGSA Support

GoodProgress

Partial Progress

No-Little Progress

Policy Initiative

15. Single Planning Doc

Yes (ip) X

16. Long-term Usage Plan

Yes X

17.Devt Delegations

Deferred X

18. Advisory Panels

Deferred X Regional Plan Panels

19. Councillor Voting Records

Deferred X

State and Local Land Use Planning


LGIRecommend

LGSA Support

GoodProgress

Partial Progress

No Progress

Policy Initiative

20. Planning Commission

Deferred X

18/04/2321

LGI Proposals: Boost Revenues

LGI Rec: Rate PeggingThe State Government free councils to determine their own income by removing statutory limitations on their rates (i.e. rate pegging) and certain fees (e.g. development application processing fees) in return for councils adopting longer-term strategic and financial planning with outcome targets.

LGI Rec: Financial Assistance Grants

The Commonwealth Government increase its financial assistance grants (FAGs) to Local Government by 20 per cent ($300 million in 2003/04 values) and then set them at a fixed percentage of:

– Gross domestic product (0.22 per cent); or – Total Commonwealth collected taxes, including GST (0.86 per cent); or– Total income taxes (1.27 per cent)

so as to restore part of the reduction in the Commonwealth’s Local Government funding as a proportion of GDP in the last two decades and also partially address the vertical fiscal underutilisation (VFU) between the Commonwealth and the lower tiers of government, especially in relation to Local Government (see Access 2004).

Boost Revenues


LGIRecommend

LGSA Support

GoodProgress

Partial Progress

No-Little Progress

Policy Initiative

21. Abolish Rate Pegging

Yes X Govt asked for IPART Review

22. Rate Peg Catch-ups

Yes X

23. Fund Rate Exemptions

Yes X

24. Fund PensionerConcessions

Yes X

25. Issue Service Pricing Guidelines

Yes X

Boost Revenues


LGIRecommend

LGSA Support

GoodProgress

Partial Progress

No-Little Progress

Policy Initiative

26. Developer Contribution Accountability

Yes X State Caps on Council DCs

27. Fix FAG as Ratio of GDP

Yes (ip) X

28. Fix GAG as Ratio of Tax Rev

Yes (ip) X

29. Revise Grants Com Methodology

No X

Boost Revenues


LGIRecommend

LGSA Support

GoodProgress

Partial Progress

No-Little Progress

Policy Initiative

30. Publish Council Disability Calcs

Yes X

31. NSW Govt. publish its total LG assistance

Yes X

18/04/2325

Improve Management

LGI Rec: Long-term PlanningAll councils develop and adopt a long-term strategic and financial plan in close consultation with their communities that would be subject to annual external compliance audits and updated in the first year of each council’s term. There would still be an operational plan – the existing annual management plan with a detailed 3-year operating and capital budget.

Improve Management


LGIRecommend

LGSA Support

GoodProgress

Partial Progress

No-Little Progress

Policy Initiative

32. Governance Structure Choices

No X

33. Increase Cap on Councillor Pay

Yes X

34. Council Strategic and Financial Plans

Yes X DLG IP&R Guidelines enacted

35. Revise DLG Performance Measures

Yes X

Improve Management


LGIRecommend

LGSA Support

GoodProgress

Partial Progress

No-Little Progress

Policy Initiative

36. Councils Benchmark Own Performance

Yes X DLG IP&R Reporting Guidelines

37. Council Resource Sharing Functional Analysis

Yes X

18/04/2328

Upgrade Financial Management

LGI Rec: Financial DataThe DLG amend its Code of Accounting Practice and Financial Reporting for councils to standardise key accounting and reporting policies, especially in relation to asset condition assessment, asset valuation, depreciation rates, capital expenditure (including the distinction between asset maintenance, renewal and expansion), a high-level chart of accounts, a workforce profile database (each with agreed definitions of terms as exists in the NSW general government sector) and key financial indicators. Any such changes should be done in close consultation with the DLG’s Accounting Advisory Group which includes members of the LGFP and LGAA.

LGI Rec: Financial BenchmarksThe LGMA re-issue its Sustainable Financial Health Check Manual with an expanded list of financial KPIs and an appropriate range of lower and upper benchmarks for each KPI along the lines shown in the table in the Inquiry’s Final Report (e.g. net financial liabilities be set between 5% and 15% of a council’s capital employed) The expanded list should be determined collaboratively by the LGMA, LGSA, DLG, LGPP, LGAA and other relevant bodies.



LGIRecommend

LGSA Support

GoodProgress

Partial Progress

No-Little Progress

Policy Initiative

38. Standardise Financial Data

Yes X DLG IP&RG & Accounting Code changes

39. Revise LGMA Financial Benchmarks

Yes X

40. Boost Local Infrastructure Borrowings

Yes (ip) X DLG Debt Service Ratio Red Alert set too low

41. Clarify Councillors’ Financial Duties

Yes X

42. Councillor Finance Training

Yes X DLG, LGSA and other training



LGIRecommend

LGSA Support

GoodProgress

Partial Progress

No-Little Progress

Policy Initiative

43. Annual Sustainability Ratings Review

Yes X Only FiscalStar’s own efforts

44. LGSA Industry Statistics and Database

Yes X

45. Capacity Building Grants and Assistance

Yes X C/w LG Reform Fund of $25m

46. Councils to be in Surplus within 3-5 years

No X

47. Financial Governance Statement in AR

Yes (ip) X

Next Steps


LGIRecommend

LGSA Support

GoodProgress

Partial Progress

No-Little Progress

Policy Initiative

48. Hold Summit Conference

No X Subsumed by Strengthening LG Taskforce

49. Independent Commission

No X

Major LG Reforms post LGI

State Govt – Commissioned IPART to review Local Government

revenue raising capacity, but no final report released yet.

– Introduced Regional Planning and Development Assessment Panels

– Established NSW Planning Commission to deal with projects of State significance, but Planning Minister may override its decisions



State Govt – Applied a $20,000 threshold on developer

contributions to councils – Commissioned Armstrong/ Gellatly Review of

Council Water Utilities which recommended various options for aggregating existing 104 local water utilities into 32 standalone regional groups and/ or looser strategic alliances. Govt has not responded to report.



DLG – Updated LG Code of Accounting Practice and

Financial Reporting introduced new Financial Statistics Template including an asset depreciation/ renewals gap indicator

– Issued new asset valuation and building expenditure guidelines



DLG Integrated Planning and Reporting Guidelines requiring:

– A 10-year Community Strategic Plan with social, economic, environment and civic leadership objectives plus strategies for achieving them. Community priorities and needs identified by community engagement processes;

– A 10-year Resourcing Strategy to fund the CSP that includes long term asset management, workforce management and financial plans.



DLG Integrated Planning and Reporting Guidelines requiring

– A 4 year Delivery Program detailing the principal activities to be undertaken to implement the CSP within the limits of the RS during a council's term in office.

– A yearly Operational Plan listing the activities to be undertaken in the current year as part of the Delivery Program. It includes the Council’s revenue policy for the year. [ Note: Revenue policy sits really awkwardly within the Operational Plan since it should be part of the Resourcing Strategy]



DLG Integrated Planning and Reporting Guidelines requiring

– An Annual Report covering achievements in implementing the Delivery Program and, in election years, including achievements in implementing the CPS by the last council.

– [Note: For political reasons, the State of the Environment Report has been retained as a stand alone document even though it should be part of the CSP planning and reporting process above]



IPWEA– Issued Australian Infrastructure Financial

Management Guidelines that integrate asset and financial management practices



C/w Govt – Introduced Regional and Local Community

Infrastructure Fund (RLCIF) for a once off boost to Council infrastructure spending worth $1 billion. ALGA lobbying to make it a recurrent annual grant.

– Introduced Local Government Reform Fund (LGRF) to build Councils’ asset management capacity worth $25 million



LGSA – Initiated Strengthening Local Government Taskforce

comprising various stakeholders, but not clear what it has achieved.

– Introduced annual survey of cost shifting by State govt onto Local govt.


Reform Overview Conclusion


LGIRecommend

LGSA Support

LGSA Part -

Support

LGSA Deferred Decision

LGSA Opposed

49 31 6 5 7



LGIRecommend

GoodProgress

Partial Progress

No-Little Progress

49 8 14 27


Except for 4 recommendations, progress in implementing the recommendations of the LGI has been patchy at best.

Fault for slow progress rests with each of the three tiers of government, but most can be traced to the inertia of the state government.

Nevertheless progress by the DLG on 4 key LGI reforms is heartening.

18/04/2343


Four key LGI proposals that have progressed:– Rec 6 (Government provide assistance to enable all councils

within 3 years to adopt a total asset management system consistent with asset accounting practices)

– Rec 11 (Each Council should develop and adopt a long-term services plan that takes into account demographic, political, economic, environmental, social and technological trends as well as existing community priorities based on opinion surveys and community consultations that disclose the costs and benefits of alternative scenarios. This plan should be a subcomponent of the long term strategic and financial plan in Rec 34. )

18/04/2344


Four key LGI proposals that have progressed:– Rec 34 (All Councils develop and adopt a long term strategic

and financial plan in consultation with their communities that would be subject to annual external compliance audits and updated in the first year of each council’s term), and

– 38 (DLG amend its Code of Accounting Practice and Financial Reporting for Councils to standardise key accounting and reporting policies especially in relation to asset condition and assessment, asset valuation, depreciation rates, capital expenditure …)

18/04/2345


Review Today’s contact details

Review Today Pty LtdMona Vale Business Centrewww.reviewtoday.com.au 1800 500 035

Bob Gaussen Managing Director [email protected] 1912 2255

Percy Allan Research Director

[email protected] 02 9810 6346

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Progress on NSW Local Govt. Sustainability since the 2006 Inquiry National L.G. Asset Management and...

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