Port Macquarie Hastings Council Financial …...Port Macquarie Hastings Council Financial Assessment and Benchmarking Report 8 October 2012 Prepared by NSW Treasury Corporation as

Port Macquarie Hastings Council Page 1

Port Macquarie Hastings Council

Financial Assessment and Benchmarking Report

8 October 2012

Prepared by NSW Treasury Corporation as part of the Local Infrastructure Renewal Scheme


Disclaimer

This report has been prepared by New South Wales Treasury Corporation (TCorp) in accordance with

the appointment of TCorp by the Division of Local Government (DLG) as detailed in TCorp’s letters of

22 December 2011 and 28 May 2012. The report has been prepared as part of the Local Infrastructure

Renewal Scheme (LIRS) announced by the NSW Government.

The report has been prepared based on information provided to TCorp as set out in Section 2.2 of this

report. TCorp has relied on this information and has not verified or audited the accuracy, reliability or

currency of the information provided to it for the purpose of preparation of the report. TCorp and its

directors, officers and employees make no representation as to the accuracy, reliability or

completeness of the information contained in the report.

In addition, TCorp does not warrant or guarantee the outcomes or projections contained in this report.

The projections and outcomes contained in the report do not necessarily take into consideration the

commercial risks, various external factors or the possibility of poor performance by the Council all of

which may negatively impact the financial capability and sustainability of the Council. The TCorp report

focuses on whether the Council has reasonable capacity, based on the information provided to TCorp,

to take on additional borrowings within prudent risk parameters and the limits of its financial projections.

The report has been prepared for Port Macquarie Hastings Council, the LIRS Assessment Panel and

the DLG. TCorp shall not be liable to Port Macquarie Hastings Council or have any liability to any third

party under the law of contract, tort and the principles of restitution or unjust enrichment or otherwise

for any loss, expense or damage which may arise from or be incurred or suffered as a result of reliance

on anything contained in this report.


Index

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

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

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

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

2.3: Overview of the Local Government Area ............................................................................... 9

2.4: LIRS Application .................................................................................................................. 10

Section 3 Review of Financial Performance and Position ............................................................... 11

3.1: Revenue .............................................................................................................................. 11

3.2: Expenses ............................................................................................................................. 11

3.3: Operating Results ................................................................................................................ 13

3.4: Financial Management Indicators ........................................................................................ 14

3.5: Statement of Cashflows....................................................................................................... 15

3.6: Capital Expenditure ............................................................................................................. 16

3.7: Specific Risks to Council ..................................................................................................... 19

Section 4 Review of Financial Forecasts ........................................................................................ 20

4.1: Operating Results ................................................................................................................ 20

4.2: Financial Management Indicators ........................................................................................ 21

4.3: Capital Expenditure ............................................................................................................. 25

4.4: Financial Model Assumption Review ................................................................................... 26

4.5: Borrowing Capacity ............................................................................................................. 27

Section 5 Benchmarking and Comparisons with Other Councils ...................................................... 28

Section 6 Conclusions and Recommendations ................................................................................. 34

Appendix A Historical Financial Information Tables ....................................................................... 35

Appendix B Glossary ..................................................................................................................... 38


Section 1 Executive Summary

This report provides an independent assessment of Port Macquarie Hastings Council financial capacity

and its ability to undertake additional borrowings. The analysis is based on a review of the historical

performance, current financial position, and long term financial forecasts. It also benchmarks the

Council against its peers using key ratios.

The report is primarily focused on the financial capacity of the Council to undertake additional

borrowings as part of the Local Infrastructure Renewal Scheme (LIRS).

Council has made two applications for the replacement of Stingray Creek Bridge at $8.6m and a local

road upgrade scheme at $10.0m.

TCorp’s approach has been to:

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

Conduct a detailed review of the Council’s 10 year financial forecasts. The review of the

financial forecasts focused on the particular Council fund that was undertaking the proposed

debt commitment. For the Council, the two projects are being funded from the General Fund

so we focused our review on the General Fund

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

Council’s own source operating revenues have been above the 60% benchmark in all three

years

Employee costs have been well controlled over the past three years, with a reduction in 2011

when compared to the 2009 expense

The combined cash and cash equivalents, and investments have increased by $35.4m to

$84.7m over the period. This increase has enabled the 2011 Unrestricted Current Ratio to be

above the benchmark, indicating Council is currently in a satisfactory liquidity position

Council has achieved DSCR and Interest Cover Ratios above the benchmark in the last three

years

In February 2008 the previous Council was dismissed and replaced by an administrator following the

cost overruns during the construction of The Glasshouse Arts Conference and Exhibition Centre (The

Glasshouse). The costs increased from the original estimate of $7.0m to approximately $42.0m by the

time the centre opened in July 2009.

Since opening, The Glasshouse has continued to adversely impact the operating performance of

Council, with an operating deficit of $6.4m p.a. in both 2010 and 2011. This severely impacts the

operating performance of Council and will continue to impact Council in future years.

It is to be noted that within the costs associated with The Glasshouse there is approximately $0.5m p.a.

in corporate overhead expense allocation along with $0.3m for the visitor information centre, $0.3m for

the art gallery and $0.1m for heritage services. This estimated $1.2m p.a. would be incurred with or

without The Glasshouse. Also within the deficit is debt servicing costs totalling 2.6m p.a.

As at 30 June 2011 Council had outstanding borrowings within their General fund of $23.8m that

relates specifically to The Glasshouse. This is forecast to reduce to $8.3m by 30 June 2022.


Council has begun a comprehensive review of the operations of The Glasshouse to further reduce the

financial impact of this facility by identifying efficiencies. Reducing the operating deficits is critical to

improving the operating performance of the Council.

The Council reported $112.5m of Infrastructure Backlog in 2011 with an infrastructure asset value of

$1,520.3m. Other observations include:

The Infrastructure Backlog has increased by $44.0m following the Asset Revaluations and

update of Council’s Asset Management Plan. $96.6m of the backlog is related to Public roads

The backlog has remained at 0.07x of the value of the infrastructure assets for all three years

Council has not invested adequately in infrastructure asset maintenance or renewals over the

period when compared to their respective benchmarks

Council’s capital expenditure investment has been on a downward trend over the three year

period and reduced below the benchmark target in 2011

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

Council are forecasting operating deficits in all 10 years when capital grants and contributions

are excluded

Council’s liquidity is forecast to remain satisfactory as indicated by an Unrestricted Current

Ratio above the benchmark in all 10 years

Council is forecasting that the Infrastructure Backlog could increase by $12.0m p.a. and are

continuing to improve their Asset Management Plan to reverse this trend

Council has forecast a growth in all funds of 1.0% p.a. in line with the forecast increase in

population in order that required service levels remain the same

Key assumptions within the financial forecasts are considered to be reasonable

In our view, the Council does not have the capacity to undertake the combined additional borrowings of

$18.6m for the two LIRS projects within the General Fund.

We are recommending the LIRS project of $8.6m for the replacement of Stingray Creek Bridge be

approved.

We do not consider that the borrowings associated with the $10.0m local road upgrade scheme should

proceed. This is based on the following analysis:

Council has forecast a further $20.0m of borrowings to be utilised across the 10 year forecast,

$11.0m of which is also within 2013

The forecast DSCR is at a level consistently below the benchmark of 2.00x for all of the

forecast period when all $38.6m of forecast borrowings are included. The DSCR is as low as

1.00x in 2013 which is the year the additional borrowings are undertaken. A DSCR at this

level is not considered to be prudent financial management

Even when the $10.0m is excluded from the financial forecasts, the DSCR remains below the

benchmark from 2013 to 2017

The Interest Cover Ratio is below the benchmark of 4.00x between 2013 and 2016


In respect of the Benchmarking analysis, TCorp has compared the Council’s key ratios, on a

consolidated basis, with other councils in DLG group 4. The key observations are:

Council’s financial flexibility, as indicated by the Operating Ratio and Own Source Operating

Revenue Ratio, is generally comparable to the group’s average

Council’s liquidity is adequate although it is generally below the group’s average

Council’s level of gearing is slightly higher than that of its peers. Its DSCR and Interest Cover

Ratio were above benchmark over the review term, but are forecast to deteriorate

Council had a lower level of Infrastructure Backlog when compared with its peers, however

Council has not achieved the benchmark throughout the review period. Council’s capital

expenditure, asset renewal and maintenance work ratios generally underperformed the

group’s average


Section 2 Introduction

2.1: Purpose of Report

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

performance measured against a peer group of councils which will complement their internal due

diligence, and the IP&R system of the Council and the DLG.

The report is to be provided to the LIRS Assessment Panel for its use in considering applications

received under the LIRS.

The key areas focused on are:

The financial capacity of the Council to undertake additional borrowings

The financial performance of the Council in comparison to a range of similar councils and

measured against prudent benchmarks

2.2: Scope and Methodology

TCorp’s approach was to:

Review the most recent three years of the Council’s consolidated audited accounts using

financial ratio analysis. In undertaking the ratio analysis TCorp has utilised ratio’s

substantially consistent with those used by Queensland Treasury Corporation (QTC) initially in

its review of Queensland Local Government (2008), and subsequently updated in 2011

Conduct a detailed review of the Council’s 10 year financial forecasts including a review of the

key assumptions that underpin the financial forecasts. The review of the financial forecasts

focused on the particular Council fund that was undertaking the proposed debt commitment.

For example where a project is being funded from the General fund we focussed our review

on the General fund

Identify significant changes to future financial forecasts from existing financial performance

and highlight risks associated with such forecasts

Conduct a benchmark review of a Council’s performance against its peer group

Prepare a report that provides an overview of the Council’s existing and forecast financial

Position and its capacity to meet increased debt commitments

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

the Council’s financial capacity and performance

In undertaking its work, TCorp relied on:

Council’s audited financial statements (2008/09 to 2010/11)

Council’s financial forecast model

Council’s IP&R documents

Discussions with Council officers

Council’s submissions to the DLG as part of their LIRS application

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


Benchmark Ratios

In conducting our review of the Councils’ financial performance and forecasts we have measured

performance against a set of benchmarks. These benchmarks are listed below. Benchmarks do not

necessarily represent a pass or fail in respect of any particular area. One-off projects or events can

impact a council’s performance against a benchmark for a short period. Other factors such as the

trends in results against the benchmarks are critical as well as the overall performance against all the

benchmarks. As councils can have significant differences in their size and population densities, it is

important to note that one benchmark does not fit all.

For example, the Cash Expense Ratio should be greater for smaller councils than larger councils as a

protection against variation in performance and financial shocks.

Therefore these benchmarks are intended as a guide to performance.

The Glossary attached to this report explains how each ratio is calculated.

Ratio Benchmark

Operating Ratio > (4.0%)

Cash Expense Ratio > 3.0 months

Unrestricted Current Ratio > 1.50x

Own Source Operating Revenue Ratio > 60.0%

Debt Service Cover Ratio (DSCR) > 2.00x

Interest Cover Ratio > 4.00x

Infrastructure Backlog Ratio < 0.02x

Asset Maintenance Ratio > 1.00x

Building and infrastructure asset renewal ratio > 1.00x

Capital Expenditure Ratio > 1.10x


2.3: Overview of the Local Government Area

Port Macquarie Hastings Council LGA

Locality and Size

Locality Mid North Coast

Area 3,686 km²

DLG Group No. 4

Demographics

Population 72,696

% under 19 24%

% between 20 and 60 44%

% over 60 32%

Expected population 2021 90,800

Operations

Number of employees 452

Annual revenue $147m

Infrastructure

Roads 15.2m m²

Bridges 143

Infrastructure backlog value $113m

Total infrastructure value $1,520m

Port Macquarie Hastings Council Local Government Area (LGA) is located 420 km north of Sydney and

510 km south of Brisbane.

The LGA has a number of small villages and the three main townships of Port Macquarie, Wauchope

and Laurieton.

As well as being recognised as a popular tourist destination, Port Macquarie is an established regional

centre with a vibrant retail and commercial district for both public and private business sectors.

The population is projected to grow by 1.3% p.a. up to 2031 following a 1.6% p.a. growth rate between

2006 and 2011.

Within Council’s buildings, other structures and infrastructure assets at 30 June 2011 there are:

$794.4m of roads, bridges and footpaths

$344.9m of water supply infrastructure

$184.9m of sewerage infrastructure

$94.6m of buildings

$89.3m of stormwater drainage

$12.2m of other structures


2.4: LIRS Application

Council has made two LIRS applications:

Project 1: Stingray Creek Bridge Replacement

Description: Realignment and replacement of the Ocean Drive Bridge over the Stingray Creek at

North Haven .The proposed bridge consists of a new 190 metre long, two-lane, single carriageway

crossing of Stingray Creek just upstream (north) of the existing bridge.

The crossing of Stingray Creek is needed to maintain the regional network which is vital to the

continued economic development of the Camden Haven region. Without this link, the residents of

the local region would be severely disadvantaged with regard to access to services and facilities. To

continue to service its regional and local functions, to address the above concerns and to ensure

that access along Ocean Drive and between the local communities is maintained, Stingray Creek

Bridge needs to be repaired or replaced.

Amount of loan facility: $8.6m

Term of loan facility: 10 years

Project 2: Hastings River Drive Upgrades, Park Street to Boundary Street, Port Macquarie

Description: Upgrades of existing sections of Hastings River Drive in line with Council's Major Roads

Improvement Strategy. The upgrades generally involve the provision of increased carriageway

capacity, pedestrian and intersection improvements in line with recent existing improvement works.

Amount of loan facility: $10.0m

Term of loan facility: 10 years


Section 3 Review of Financial Performance and Position

In reviewing the financial performance of the Council, TCorp has based its review on the annual

audited accounts of the Council unless otherwise stated.

3.1: Revenue

Key Observations

Operating revenues have increased by $12.7m over the period, representing an average

6.1% p.a.

Rates and annual charges increased by 7.6% in total in 2011. Rates were boosted by a one

year SRV of 7.3% on top of the 2.8% rate peg increase for 2011 to assist with the roads

maintenance budget. This provided a $3.6m increase in total ordinary rates in 2011. The

increase in annual charges was 3.8% therefore the overall rates and annual charges increase

in 2011 was lower than the SRV percentage increase.

Council has successfully applied to IPART for its existing SRV to remain permanent plus an

additional temporary SRV of 4.43% for five years to provide funds to address the

Infrastructure Backlog.

User charges and fees have fluctuated but increased by 6.0% across the period. The

reduction from 2010 was due to reduced water consumption, owing to inclement weather and

also reduced planning and building fees. The overall increase between 2009 and 2011 relates

to increased transport and communication fees from $2.1m to $3.7m.

Council’s own source operating revenue is above the 60% benchmark in each of the three

years, equating to 62.7% in 2011.

67,041 62,299 58,768

22,84924,245

21,552

5,1703,160

2,873

13,86213,174

14,665

5,6035,027 3,927

1,866

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2011 2010 2009

Figure 1 - Revenue Sources for 2008/09 to 2010/11 ($'000s)

Rates and annual charges User charges and fees

Interest and investment revenue Grants and contributions for operating purposes

Other revenues Net gain from disposal of assets


Interest and investment revenue increased by $2.0m in 2011 due to an increase in

investments utilised of $28.4m.

Other revenues have increased over the period mainly due to revenue from The Glasshouse.

This added $1.0m in 2011 and $0.9m in 2010 (This revenue was offset by the related

expenses that led to a $6.4m operating loss in both years for The Glasshouse.

The net gain from disposal of assets in 2010 relates to real estate asset sales during the year.

3.2: Expenses

Key Observations

Total expenses increased by $19.1m over the period, representing an average 8.9% p.a.

Employee costs have marginally reduced over the period with a slight reduction in employee

numbers contributing to decreased salaries and wages by $0.5m. There was also a reduction

in employee leave entitlements by $1.5m.

Materials and contract expenses increased by 12.8% in 2011 due to raw materials increases

relating to additional road maintenance works of $2.9m completed during the year.

Depreciation had the largest nominal increase across the period of $7.4m, an average 11.0%

p.a. and is the largest expense in 2011. This has coincided with the Council’s Asset

Revaluations that has seen infrastructure, property, plant and equipment (IPP&E) depreciation

increase by $3.2m in 2011. The completed construction of The Glasshouse contributed $1.8m

p.a. in 2010 and 2011 to the increased depreciation charge.

Borrowing costs have increased by $2.1m over the period, in line with an increase in

borrowings over the three years of approximately $19m.

35,139 34,205 35,392

5,679 5,171 3,546

31,088 27,565 28,723

41,03236,633 33,653

7,819

6,8936,090

6,176

434

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2011 2010 2009

Figure 2 - Expenses for 2008/09 to 2010/11 ($'000s)

Employees Borrowing costs

Materials and contract expenses Depreciation and amortisation

Other expenses Net losses from disposal of assets


Other expenses have consistently increased by over 13% p.a. predominantly due to electricity

and heating costs and increased payments to other levels of Government due to the

increased waste and environmental levy payable to the NSW State Government.

The 2011 net loss from the disposal of assets has contributed to the large increase in expenses in that year. This loss of $6.2m is mainly due to the $5.7m loss on disposal of road assets at the time of their rehabilitation. The smaller 2009 net loss was also mainly due to the disposal of infrastructure assets.

3.3: Operating Results

TCorp has made some standard adjustments to focus the analysis on core operating council results.

Grants and contributions for capital purposes, realised and unrealised gains on investments and other

assets are excluded, as well as one-off items which Council have no control over (e.g. impairments).

TCorp believes that the exclusion of these items will assist in normalising the measurement of key

performance indicators, and the measurement of Council’s performance against its peers.

All items excluded from the income statement and further historical financial information is detailed in

Appendix A.

Key Observations

Council posted operating deficits excluding capital grants and contributions in all three years

that have widely fluctuated with the weakest performance of the last three years being 2011.

The net loss from the disposal of road assets and the increased depreciation are the main

factors for the operating deficit in 2011.

(12,408)

(696)

(6,053)

16,505

23,148

16,904

(15,000)

(10,000)

(5,000)

0

5,000

10,000

15,000

20,000

25,000

2011 2010 2009

Figure 3 - Operating Results for 2008/09 to 2010/11 ($'000s)

Operating result (excluding capital grants and contributions)

Operating result (including capital grants and contributions)


The 2010 result improved in part due to the strong management of expenses with employee

costs, and materials and contract expenses both decreasing in that year.

Excluded from the operating result in 2009 is an impairment charge of $15.4m, relating to

Council revaluing their CDO’s at fair value following the impact of the global financial crisis.

The fair value adjustments to investments in 2010 and 2011 have therefore also been

excluded.

3.4: Financial Management Indicators

Performance Indicators Year ended 30 June

2011 2010 2009

EBITDA ($’000s) 34,303 41,108 31,146

Operating Ratio (10.8%) (0.6%) (5.9%)

Interest Cover Ratio 6.04x 7.95x 8.78x

Debt Service Cover Ratio (DSCR) 2.55x 3.36x 3.09x

Unrestricted Current Ratio 1.89x 1.41x 0.96x

Net assets ($'000s) 1,765,378 1,587,490 1,107,489

Key Observations

Council’s EBITDA was higher in 2010 due to the stronger operating performance, specifically

minimising the increase in operating expenses to 2.4% against 2009.

The Operating Ratio decreased in 2011 due to the increased depreciation and loss on the

disposal of assets resulting in a deficit result worse than the benchmark.

The Interest Cover Ratio is on a downward trend due to the increase in borrowing interest

costs as Council has increased its total borrowings over the period, but it remains above the

benchmark in each year. If this trend was to continue then the benchmark may be breached

within the next few years.

Council’s DSCR has decreased in 2011 due to increased debt service payments. However it

remains above the benchmark, indicating Council currently has a sustainable level of debt.

The Unrestricted Current Ratio has shown an upward trend and is above the benchmark in

2011. Council was therefore comfortable in meeting all their short term liabilities as they fell

due. A decrease back towards the 2009 result could create liquidity pressures.

The Net Assets have increased due to consecutive Asset Revaluations that provided an

increase of $451m in 2010 and $112m in 2011. Council also benefitted from a change in

accounting policy in 2011 relating to land under roads, which added a further $48m in value.

When excluding the Asset Revaluations and the accounting policy amendment, the

underlying trend has been an expansion of the IPP&E asset base with asset purchases larger

than the combined value of disposed assets and annual depreciation in two of the three

years. The combined increase across the three years is $41.9m.

Council’s total borrowings stood at $95.9m in 2011, an increase from $91.7m in 2009. This

equates to 5.4% of Net Assets.

Of the total borrowings, $53.4m relates to the General Fund and as previously mentioned

approximately $23.8m of the $53.4m relates to the Glasshouse development loans. These

borrowings cost Council approximately $2.6m to service in 2011.


3.5: Statement of Cashflows

Key Observations

Council’s cash and cash equivalents have widely fluctuated over the period after the large

increase in 2010. The decrease in 2011 is driven by an investment of $16.0m in additional

short term deposits that are classified under current investments as opposed to 2010 when

this amount was held under deposits at call.

Overall cash and cash equivalents, and investments combined have increased across the

three year period by $49.3m to $84.7m in 2011.

Of the $84.7m, $65.4m is externally restricted, $19.0m is internally restricted and $0.2m is

unrestricted.

The investments portfolio of $75.7m is made up of $40.0m in current deposits, $12.0m in non-

current deposits, $10.8m in equity linked notes, $9.0m in floating rate notes and $3.9m in

CDO’s. The CDO total has reduced from $8.5m in 2009 as they have been redeemed and will

wind down to zero following the Ministerial Investment Order that was issued in August 2008.

Council has since redeemed one CDO since 2011 at below face value and still has CDOs

with a market value of $1.4m in June 2012 although they currently expect to realise a full

capital loss on these remaining securities.

9,024

24,804

4,5010

5,000

10,000

15,000

20,000

25,000

30,000

2011 2010 2009

Figure 4 - Cash and Cash Equivalents for 2008/09 to 2010/11 ($'000s)


3.6: Capital Expenditure

The following section predominantly relies on information obtained from Special Schedules 7 and 8 that

accompany the annual financial statements. These figures are unaudited and are therefore Council’s

estimated figures.

3.6(a): Infrastructure Backlog

The Infrastructure Backlog has increased over the three year period and stands at $112.5m in

2011, up from $68.5m in 2009. The increases have occurred alongside the Asset

Revaluations, with public roads now representing $96.6m of the backlog.

The completion of the two projects detailed within the LIRS applications would see a

reduction in the road backlog total by approximately $25m.

0

20,000

40,000

60,000

80,000

100,000

120,000

Buildings and other

structures

Public roads (inc.

footpaths and car parks)

Water Sewerage Drainage Works

Figure 5 - Infrastructure Backlog for 2008/09 to 2010/11 ($'000s)

2011 2010 2009

3%

86%

1%1%

9%

Figure 6 - Infrastructure Backlog Composition for 2010/11

Buildings and other structures

Public roads (inc. footpaths and car

parks)

Water

Sewerage

Drainage Works


3.6(b): Infrastructure Status

Infrastructure Status Year ended 30 June

2011 2010 2009

Bring to satisfactory standard ($’000s) 112,481 106,973 68,470

Required annual maintenance ($’000s) 34,934 23,652 20,227

Actual annual maintenance ($’000s) 16,560 15,326 15,902

Total value of infrastructure assets ($’000s) 1,520,283 1,463,450 946,964

Total assets ($’000s) 1,895,153 1,724,460 1,233,543

Infrastructure Backlog Ratio 0.07x 0.07x 0.07x

Asset Maintenance Ratio 0.47x 0.65x 0.79x

Building and Infrastructure Renewals Ratio 0.22x 0.23x 0.15x

Capital Expenditure Ratio 0.92x 1.15x 2.18x

The Infrastructure Backlog Ratio has remained consistent at 0.07x of the total infrastructure,

buildings and other structures value, with the backlog increasing in proportion to the upward

Asset Revaluations.

The Asset Maintenance Ratio is on a downward trend, with the actual maintenance expended

remaining reasonably constant, while the required amount has increased each year. The

Council’s Asset Management Plan (AMP) is indicating that there will be a continuing shortfall

of $15m p.a. that may impact the backlog figure.

The Buildings and Infrastructure Renewals Ratio remains well below benchmark. The

majority of capital expenditure on IPP&E is being spent on the purchases of new assets as

opposed to the renewal of existing assets.

The Capital Expenditure Ratio has been on a downward trend however in 2009 & 2010 the

amount invested was above the benchmark. The increased IPP&E depreciation each year

has impacted the ratio alongside a decrease in asset purchases. In total over the three years

Council has invested above the benchmark by $29.3m but if the downward trend continues or

the ratio remains at the 2011 result then there will be additional pressure on the existing

IPP&E in future years.

Overall it appears Council have focused on expanding their infrastructure asset base in the

last three years while not funding the renewals and maintenance of existing assets to the

required level. If this were to continue this will lead to the issue of deteriorating assets as

there will be a continuously growing asset base that is not receiving the appropriate level of

funding to maintain it at its satisfactory level.


3.6(c): Capital Program

The following figures are sourced from the Council’s Annual Financial Statements at Special Schedule

No. 8 and are not audited. New capital works are major non-recurrent projects.

Capital Program ($’000s) Year ended 30 June

2011 2010 2009

New capital works 49,265 45,193 76,000

Replacement/refurbishment of existing assets 0 0 0

Total 49,265 45,193 76,000

The major capital expenditure project completed within the last three years has been The Glasshouse,

which as previously stated was completed with a large cost overrun.

In 2011 the capital expenditure breakdown has been:

$21.7m in new infrastructure assets

$5.2m in plant and equipment

$18.3m in work in progress, of which $15.9m relates to further infrastructure assets

purchases and upgrades

Some specific projects with a value over $1.0m in 2011 included:

Camden Haven sewer treatment plant augmentation - $6.3m

Fluoridation facilities at Rosewood reservoirs - $1.8m

Stage 1 of the $25m Southern Arm Trunk Main water pipeline - $1.5m

Major Innes Road rehabilitation/upgrade - $1.1m

Area 13 sewerage facilities - $1.1m


3.7: Specific Risks to Council

Population growth. Council’s population has increased in the past five years at 1.6% p.a.,

above the NSW average of 1.4%. It is expected to continue to increase at 1.3% to 2031

placing pressure on existing assets while increasing the demand for new infrastructure and

services. One of the five focus areas within Council’s CSP relates specifically to infrastructure

development. The Council’s AMP is the critical document that will link the initiatives of the

CSP to the LTFP and continues to be updated and refined.

Ageing workforce. Council has an average workforce age of 47.1 years when casuals and

temporary staff are excluded. This is projected to continue to increase to above 50 years by

2031. There are currently more than 100 employees over the age of 55. Council, as part of

their Workforce Management Strategy, are focused on the retention of knowledge and skills

within their staff base while also being in a position to attract suitably qualified and

experienced new employees.

Council being taken out of administration in September 2012. The newly elected councillors

will have to take over from the administrator and be able to immediately manage the ongoing

pressures and operational issues that the Council faces.

Ongoing management of The Glasshouse. Council has had to absorb two consecutive

operating deficits of $6.4m in 2010 and 2011 specific to this asset. If this is to continue it will

hamper the ability of Council to achieve an acceptable operating surplus position.

Asset Revaluations. Council is completing the revaluation of water and sewer infrastructure

assets in 2012 and this may further increase the valuation of the Infrastructure Backlog.


Section 4 Review of Financial Forecasts

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

The model provided by Council included the $8.6m loan for the Stingray bridge replacement without

the LIRS subsidies but the $10.0m loan relating to the road upgrade, was excluded. TCorp has

therefore amended the forecast to include this additional $10.0m over a 10 year term at an interest rate

of 8.0%, the same rate that Council have input for the $8.6m loan.

The LIRS loans both relate to the General Fund, therefore we have focused our financial analysis

solely upon this Fund. Council’s consolidated position includes both a Water and Sewer Fund however

these are operated as independent entities, which unlike the General Fund are able to adjust the

appropriate fees and charges to meet all future operating and investing expenses.

In respect of the models provided by Council, TCorp have amalgamated the results of the General

Fund, Waste Management Fund and The Glasshouse to provide a like for like position to the General

Fund figures noted within Note 21 of the 2010/11 audited financial statements.

The scenario that has been analysed related to the continuation of Council’s SRV that was approved

by IPART as well as an additional approved SRV for five years in June 2012.

4.1: Operating Results

Council is forecasting a deficit position significantly below the benchmark for the full duration of the 10

year period. The forecast indicates deficits between $15.5m and $20.4m p.a. and this may negatively

impact on Council’s long term financial sustainability.

The continuous operating deficits are impacted by increasing depreciation charges and these results

will likely reduce Council’s Net Assets over time. Council may not be in an adequate financial position

to fund the capital expenditure required to replace existing assets or purchase new assets.

Within the forecast Council has included the losses on the disposal of road assets when they are

replaced with new paving or realigned. This represented a $4.2m loss in 2011 within the General Fund

and Council has forecast losses of $2.0m p.a. in every year of the 10 year forecast within the General

Fund.

(25.0%)

(20.0%)

(15.0%)

(10.0%)

(5.0%)

0.0%

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

Figure 7- Operating Ratio for General Fund

Operating Ratio Benchmark


This would indicate that Council’s depreciation calculation may not be completely aligned with asset

life. It may be more accurate to expense the cost of the roads as a depreciation charge throughout the

life of the assets rather than as losses on the disposal of assets at the end of their useful life. As

Council improves its Asset Management Planning and co-ordination with its 10 year financial forecasts

this issue may be addressed.

4.2: Financial Management Indicators

Liquidity Ratios

Council has not forecast a balance for the cash and cash equivalents as within the model any cash

reserves have been accumulated within current investments.

(0.5 months)

0.0 months

0.5 months

1.0 months

1.5 months

2.0 months

2.5 months

3.0 months

3.5 months

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

Figure 8 - Cash Expense Ratio for General Fund

Cash Expense Ratio Benchmark

0.0 months

2.0 months

4.0 months

6.0 months

8.0 months

10.0 months

12.0 months

14.0 months

16.0 months

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

Figure 9 - Cash Expense Ratio for General Fund inc. Current Investments

Cash Expense Ratio inc. Current Investments Benchmark


If the current investments were included, the Cash Expense Ratio the performance improves above 3.6

months for each year of the forecast. This indicates that Council is investing any unutilised cash in term

deposit accounts to gain a more favourable financial return. It is to be noted that this calculation does

not take into account the external restrictions on Council’s cash and investments that would reduce the

amount available to cover Council’s short term liabilities.

The Unrestricted Current Ratio appears to show a realistic position for the first five years of the model

to 2017 with steep increases each year after that, to levels not in line with the historical performance.

Council has forecast to be below the benchmark for three consecutive years from 2013. This indicates

that Council will have limited flexibility during this period and any unexpected negative financial events

may require Council to seek short term alternative sources of finance to meet their creditor payments.

The increase in this ratio from 2016 relates to the forecast increase in current investments. This

increase is at the expense of the Capital Expense Ratio as stated in section 4.3.

Fiscal Flexibility Ratios

1.89x1.66x

1.23x 1.16x1.40x

1.75x2.22x

2.88x

3.41x

4.12x

4.75x

5.82x

0.00x

1.00x

2.00x

3.00x

4.00x

5.00x

6.00x

7.00x

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

Figure 10 - Unrestricted Current Ratio for General Fund

Benchmark

45%

50%

55%

60%

65%

70%

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

Figure 11 - Own Source Operating Revenue Ratio for General Fund

Own Source Operating Revenue Ratio Benchmark


Council has historically received up to 30% of their total revenue from grants and contributions

(operating and capital combined). This is indicated in the 2011 Own Source Operating Revenue Ratio

being below the benchmark. Council has forecast this ratio to improve above the benchmark in each

year of the model excluding 2013. The 2013 ratio is impacted by increased capital grants and

contributions including the $10m specific capital grants scheduled to assist both the upgrade of the

airport and the Ocean Drive road upgrade that one of the LIRS applications relate to.

Excluding this one-off year, Council have forecast a result above the benchmark due to lower capital

grants and contributions forecast from 2015. Given the reliance on this source of revenue in previous

years, this may not show an accurate position in terms of Council’s true fiscal flexibility when analysing

this ratio.

When both LIRS loans are included within the forecast, Council is predicted to be below the benchmark

for each of the 10 years. This is because Council is also planning on utilising an additional $10.0m of

debt in 2013 for the airport upgrade and $1.0m of debt for other infrastructure asset capital

expenditure. They are also forecast to utilise $1.0m p.a. from 2014 to 2022.

While Council remains above 1.00x times it indicates that Council could afford the additional debt

repayments however in doing so it would be placing their financial position in jeopardy. An adverse

financial event with such a low ratio would likely impact on the level of services that Council is able to

deliver as they would need to cut services to be able to meet the debt repayments.

2.92x

1.93x

1.00x1.12x 1.13x 1.18x 1.25x 1.32x 1.41x 1.42x 1.41x

1.53x

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

3.00x

3.50x

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

Figure 12 - DSCR for General Fund

Benchmark


If the $10.0m LIRS loan is excluded the DSCR improves, however the benchmark is still not met until

2017. This indicates that Council would have to delay more than just the $10.0m LIRS loan before they

were able to perform above the benchmark.

The Interest Cover Ratio is forecast to decrease below the benchmark for four years from 2013. The

decrease below the benchmark highlights that the additional $18.6m relating to the two LIRS loans,

alongside the other additional $11.0m in 2013, will place a burden on Council’s ability to service the

borrowings in the early years before Council’s EBITDA improves gradually and interest costs reduce

over the period of the model as net borrowings decrease.

This indicates that Council will not have sufficient capacity to service the additional interest costs of

both LIRS loans.

2.92x

1.93x

1.55x1.73x 1.75x 1.85x

1.98x2.09x

2.27x 2.34x 2.37x2.62x

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

3.00x

3.50x

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

Figure 13- DSCR for General Fund with $10.0m excluded

Benchmark

5.05x4.28x

2.80x 3.10x 3.33x 3.61x4.12x 4.47x

5.24x6.01x

6.98x

9.35x

(1.00x)

1.00x

3.00x

5.00x

7.00x

9.00x

11.00x

13.00x

15.00x

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

Figure 14 - Interest Cover Ratio for General Fund

Benchmark


4.3: Capital Expenditure

The Capital Expenditure Ratio is only forecast above the benchmark in 2012 and 2013, which is tied in

to the LIRS applications, airport upgrade and the corresponding capital programs. After this large

capital outlay, Council shows a deteriorating performance against the benchmark with the cumulative

deficit figure for capital expenditure versus depreciation across the 10 year period amounting to

$73.6m.

With the population forecast to grow by 1.3% p.a. for the next 20 years, this ratio indicates Council will

not adequately expand their net asset base in line with the required rate. This will likely contribute to a

further deterioration of the existing asset base as additional pressure is experienced from increased

usage of the assets.

As highlighted in the Liquidity Ratio section 4.2, Council has forecast the decline in the Capital Expense

Ratio while current investments are forecast to increase. The cash and investments are forecast to

increase while the capital expenditure decreases.

It may be possible to utilise the additional funds within current investments to assist funding the

difference between the forecast capital expenditure and the benchmark.

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

3.00x

3.50x

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

Figure 15 - Capital Expenditure Ratio for General Fund

Capital Expenditure Ratio Benchmark


4.4: Financial Model Assumption Review

Councils have used their own assumptions in developing their forecasts.

In order to evaluate the validity of the Council’s forecast model, TCorp has compared the model

assumptions versus TCorp’s benchmarks for annual increases in the various revenue and expenditure

items. Any material differences from these benchmarks should be explained through the LTFP.

TCorp’s benchmarks:

Rates and annual charges: TCorp notes that the LGCI increased by 3.4% in the year to

September 2011, and in December 2011, IPART announced that the rate peg to apply in the

2012/13 financial year will be 3.6%. Beyond 2013 TCorp has assessed a general benchmark

for rates and annual charges to be increased by mid-range LGCI annual increases of 3%

Interest and investment revenue: annual return of 5%

All other revenue items, the estimated annual CPI increase of 2.5%

Employee costs: 3.5% (estimated CPI+1%)

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

Key Observations and Risks

Council has forecast a growth in all funds of 1.0% p.a. in line with the forecast increase in

population in order that required service levels remain the same.

Rates and annual charges are forecast to increase above CPI in line with the approved SRV.

Once this expires in 2017 a slight reduction of 0.1% in forecast in 2018 and then the forecast

increases by 3.2% p.a. for the remaining years.

User fees and charges are forecast to increase 4.3% in 2013 then by 2.6% p.a. in each year

thereafter.

Council have forecast interest and investment income to return 6.0% p.a. With the RBA

reducing the cash rate to 3.5% in June 2012, a return of 6.0% may be optimistic in the current

economic climate.

Employee costs are forecast to increase by 0.9% in 2013 but then by 4.0% in each year

thereafter. The 4% increase is higher than the historic performance but is only 0.5% above

our employee cost benchmark.

Similarly to interest and investment revenue, Council have forecast borrowing interest rates at

8.0% and this may be too high following the reduction in the cash rate.

Council is forecasting a loss on the disposal of assets of $2.0m in each of the 10 years due to

the ongoing write-off of infrastructure assets when they are rehabilitated.

Council has forecast an approximate $15m p.a. shortfall in maintenance funding that will

negatively impact IPP&E quality and potentially add to the backlog. The 4.43% component of

the approved SRV from 2013 for five years will contribute to a reduction of this shortfall.

Other operating payments are forecast to increase by 8.9%, 12.3% and 9.3% in 2013, 2014

and 2015. As with the historical expenses, Council has forecast these increases due to

increased electricity and the continued increase in the waste and environmental levy linked to

waste going to landfill.


Council is forecasting that the Infrastructure Backlog could increase by $12.0m p.a. and are

continuing to improve their Asset Management Plan to fully understand the implications of this

issue on Council’s finances.

Taking the above comments into consideration, we consider the assumptions used by Council are

realistic. There are no categories forecast to continuously increase over or under 1% against TCorp’s

benchmarks unless a specific reason is provided and while the interest rates of 6.0% to be received

and 8.0% to be paid may now be slightly out of date, the change in rate will not critically impact the

forecast.

4.5: Borrowing Capacity

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

the $18.6m LIRS loan facilities along with the already scheduled loan funding of $20.0m. Some

comments and observations are:

As indicated in Section 4.2, Council does not have sufficient capacity to service the total

$38.6m as their DSCR is below 2.00x for all 10 years and their Interest Cover Ratio is also

below benchmark in the medium term

Council already has significant debt commitments within the General Fund following the cost

overrun of The Glasshouse. Until these borrowings are repaid, or the operating performance

of this asset is significantly improved, it limits Council’s capacity to manage additional

borrowings


Section 5 Benchmarking and Comparisons with Other Councils

As discussed in section 2 of this report, each council’s performance has been assessed against ten key

benchmark ratios. The benchmarking assessment has been conducted on a consolidated basis (that is,

for councils that operate more than one fund, the results of all funds are included). This section of the

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

DLG Group 4. There are 32 councils in this group and at the time of preparing this report, we have data

for 19 of these councils.

In Figure 16 to Figure 22, the graphs compare the historical performance of Council with the benchmark

for that ratio, with the average for the Group, with the highest performance (or lowest performance in the

case of the Infrastructure Backlog Ratio where a low ratio is an indicator of strong performance), and with

the forecast position of the Council as at 2016 (as per Council’s LTFP). Figures 23 to 25 do not include

the 2016 forecast position as those numbers are not available.

Where no highest line is shown on the graph, this means that Council is the best performer in its group

for that Ratio.

Financial Flexibility

Council’s Operating Ratio was adequate in the past three years, largely tracking benchmark and the

group’s average. Council’s operating results are forecast to decline significantly over the medium term.

(20.0%)

(15.0%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

2009 2010 2011 2016

Figure 16 - Operating Ratio Comparison

Benchmark Highest

Average Port Macquarie Hastings Council


Council’s Own Source Operating Revenue was above the benchmark in the past three years and

comparable to the group’s average over the same period. The proportion of own sourced revenue is

forecast to increase, consistent with the other councils in the group.

Overall, Council’s financial flexibility has been sound, although containing operating expenditure is

expected to present a challenge in future years.

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

2009 2010 2011 2016

Figure 17 - Own Source Operating Revenue Ratio Comparison

Benchmark Highest



Liquidity

Overall, Council’s liquidity position was adequate in the past three years but generally below the group’s

average. Cash Expense Ratio is forecast to decline over the medium term, while the Unrestricted

Current Ratio is expected to be maintained at satisfactory levels.

0.0 months

2.0 months

4.0 months

6.0 months

8.0 months

10.0 months

12.0 months

14.0 months

2009 2010 2011 2016

Figure 18 - Cash Expense Ratio Comparison

Benchmark Highest


1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2009 2010 2011 2016

Figure 19 - Unrestricted Current Ratio Comparison

Benchmark Highest



Debt Servicing

Council’s DSCR and Interest Cover Ratio were sufficient in the past three years, being maintained at

above benchmark levels. Generally, Council has underperformed against its peers, indicating that it has

a higher level of gearing than the average council in the group.

In considering Council’s future debt servicing capacity, TCorp has assumed that Council does not

proceed with the $10m Hastings River Drive Upgrade. Even with this excluded, the DSCR is forecast to

decline over the medium term.

-

5.00

10.00

15.00

20.00

2009 2010 2011 2016

Figure 20 - Debt Service Cover Ratio Comparison

Benchmark Highest


-

5.00

10.00

15.00

20.00

25.00

30.00

2009 2010 2011 2016

Figure 21 - Interest Cover Ratio Comparison

Benchmark Highest



Asset Renewal and Capital Works

-

0.50

1.00

1.50

2.00

2.50

3.00

2009 2010 2011 2016

Figure 22 - Capital Expenditure Ratio Comparison

Benchmark Highest


-

0.20

0.40

0.60

0.80

1.00

1.20

2009 2010 2011

Figure 23 - Asset Maintenance Ratio Comparison

Benchmark Highest



Council’s Infrastructure Backlog was lower than the group’s average but above benchmark over the

review period. The backlog has remained at a constant level for all three years.

Council’s capital, asset renewal and maintenance work ratios were generally deficient when compared

with their respective benchmarks and the results of the other councils in the group.

-

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

2009 2010 2011

Figure 24 - Infrastructure Backlog Ratio Comparison

Benchmark Lowest


-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2009 2010 2011

Figure 25 - Building and Infrastructure Asset Renewal Ratio

Benchmark Highest



Section 6 Conclusion and Recommendations

Based on our review of both the historic financial information and the 10 year financial forecast within

Council’s long term financial plan we consider Council to be in an adequate financial position. It appears

that the development of the Glasshouse has had a significant negative impact on Council’s fiscal

flexibility and continues to impact on the operating performance due to its ongoing operational expenses

being larger than its current revenue generating capacity.

In reviewing Council’s ability to manage the additional $18.6m of the LIRS facilities we do not

recommend the LIRS subsidy is provided for both applications. We recommend that the LIRS subsidy is

provided for the $8.6m loan but not the $10.0m.

We base our recommendation on the following key points:

Council is proposing to utilise $11.0m in addition to the $18.6m for LIRS in 2013 that adds

additional debt service costs

When analysing Council’s DSCR it remains below our benchmark of 2.00x for all 10 years and

is as low as 1.00x in 2013 when all borrowings are included

When the $10.0m LIRS loan facility is removed from Council’s LTFP forecast the DSCR

remains below the 2.00x benchmark for five years from 2013 to 2017 with a low of 1.55x in

2013

As Council pays down borrowings related to The Glasshouse and/or improves the operating

performance of this asset, their financial position will strengthen and will have increased fiscal

flexibility to manage additional borrowings to assist reducing the Infrastructure Backlog

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

The $10.0m LIRS facility could be recommended if the $10.0m loan relating to the Airport was

not utilised

We acknowledge that Council are undertaking a comprehensive review of The Glasshouse

operations and commend this approach so that efficiencies are achieved to reduce the financial

strain that this facility puts Council under

Council may be able to utilise the forecast increasing cash and investments to reduce their

Infrastructure Backlog


Appendix A Historical Financial Information Tables

Table 1- Income Statement

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

2011 2010 2009 2011 2010

Revenue

Rates and annual charges 67,041 62,299 58,768 7.6% 6.0%

User charges and fees 22,849 24,245 21,552 (5.8%) 12.5%

Interest and investment revenue 5,170 3,160 2,873 63.6% 10.0%

Grants and contributions for operating purposes 13,862 13,174 14,665 5.2% (10.2%)

Other revenues 5,603 5,027 3,927 11.5% 28.0%

Net gain from disposal of assets 0 1,866 0 (100.0%) N/A

Total revenue 114,525 109,771 101,785 4.3% 7.8%

Expenses

Employees 35,139 34,205 35,392 2.7% (3.4%)

Borrowing costs 5,679 5,171 3,546 9.8% 45.8%

Materials and contract expenses 31,088 27,565 28,723 12.8% (4.0%)

Depreciation and amortisation 41,032 36,633 33,653 12.0% 8.9%

Other expenses 7,819 6,893 6,090 13.4% 13.2%

Net losses from disposal of assets 6,176 0 434 N/A (100.0%)

Total expenses 126,933 110,467 107,838 14.9% 2.4%

Operating result (excluding capital grants and contributions) (12,408) (696) (6,053) 1682.8% (88.5%)

Operating result (including capital grants and contributions) 16,505 23,148 16,904 (28.7%) 36.9%

Table 2 - Items excluded from Income Statement

Excluded items ($’000s)

2011 2010 2009

Grants and contributions for capital purposes 28,913 23,844 22,957

Gain on recognition of interest-free loan 0 1,813 0

Increase (Decrease) in the fair value of investments 3,078 1,920 (373)

Interest and investment losses - impairments 0 0 15,422


Table 3 - Balance Sheet

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

2011 2010 2009 2011 2010

Current assets

Cash and equivalents 9,024 24,804 4,501 (63.6%) 451.1%

Investments 45,975 25,016 11,626 83.8% 115.2%

Receivables 14,499 13,474 15,175 7.6% (11.2%)

Inventories 1,011 1,141 1,205 (11.4%) (5.3%)

Other 706 707 708 (0.1%) (0.1%)

Non-current assets classified as held for sale 1,999 1,999 7,392 0.0% (73.0%)

Total current assets 73,214 67,141 40,607 9.0% 65.3%

Non-current assets

Investments 29,681 22,252 19,264 33.4% 15.5%

Receivables 7,491 6,844 1,989 9.5% 244.1%

Inventories 168 168 168 0.0% 0.0%

Infrastructure, property, plant & equipment 1,784,599 1,628,055 1,171,515 9.6% 39.0%

Total non-current assets 1,821,939 1,657,319 1,192,936 9.9% 38.9%

Total assets 1,895,153 1,724,460 1,233,543 9.9% 39.8%

Current liabilities

Payables 9,979 10,799 11,312 (7.6%) (4.5%)

Borrowings 8,076 7,783 6,501 3.8% 19.7%

Provisions 13,791 13,929 13,857 (1.0%) 0.5%

Total current liabilities 31,846 32,511 31,670 (2.0%) 2.7%

Non-current liabilities

Payables 8,624 8,624 8,624 0.0% 0.0%

Borrowings 87,843 94,336 85,192 (6.9%) 10.7%

Provisions 1,462 1,499 568 (2.5%) 163.9%

Total non-current liabilities 97,929 104,459 94,384 (6.3%) 10.7%

Total liabilities 129,775 136,970 126,054 (5.3%) 8.7%

Net assets 1,765,378 1,587,490 1,107,489 11.2% 43.3%


Table 4-Cashflow

Cash Flow Statement ($'000s) Year ended 30 June

2011 2010 2009

Cash flows from operating activities 43,854 50,163 40,710

Cash flows from investing activities (53,193) (42,099) (54,283)

Proceeds from borrowings and advances 1,000 19,309 20,340

Repayment of borrowings and advances (7,771) (7,070) (6,523)

Cash flows from financing activities (6,771) 12,239 13,817

Net increase/(decrease) in cash and equivalents (16,110) 20,303 244

Cash and equivalents 9,024 24,804 4,501


Appendix B Glossary

Asset Revaluations

In assessing the financial sustainability of NSW councils, IPART found that not all councils reported

assets at fair value.1 In a circular to all councils in March 20092, DLG required all NSW councils to

revalue their infrastructure assets to recognise the fair value of these assets by the end of the 2009/10

financial year.

Collateralised Debt Obligation (CDO)

CDOs are structured financial securities that banks use to repackage individual loans into a product that

can be sold to investors on the secondary market.

In 2007 concerns were heightened in relation to the decline in the “sub-prime” mortgage market in the

USA and possible exposure of some NSW councils, holding CDOs and other structured investment

products, to losses.

In order to clarify the exposure of NSW councils to any losses, a review was conducted by the DLG with

representatives from the Department of Premier and Cabinet and NSW Treasury.

A revised Ministerial investment Order was released by the DLG on 18 August 2008 in response to the

review, suspending investments in CDOs, with transitional provisions to provide for existing investments.

Division of Local Government (DLG)

DLG is a division of the NSW Department of Premier and Cabinet and is responsible for local

government across NSW. DLG’s organisational purpose is “to strengthen the local government sector”

and its organisational outcome is “successful councils engaging and supporting their communities”.

Operating within several strategic objectives DLG has a policy, legislative, investigative and program

focus in matters ranging from local government finance, infrastructure, governance, performance,

collaboration and community engagement. DLG strives to work collaboratively with the local government

sector and is the key adviser to the NSW Government on local government matters.

Depreciation of Infrastructure Assets

Linked to the asset revaluations process stated above, IPART’s analysis of case study councils found

that this revaluation process resulted in sharp increases in the value of some council’s assets. In some

cases this has led to significantly higher depreciation charges, and will contribute to higher reported

operating deficits.

EBITDA

1IPART “Revenue Framework for Local Government” December 2009 p.83

2 DLG “Recognition of certain assets at fair value” March 2009

http://useconomy.about.com/od/glossary/g/Banking.htm


EBITDA is an acronym for “earnings before interest, taxes, depreciation, and amortisation”. It is often

used to measure the cash earnings that can be used to pay interest and repay principal.

Grants and Contributions for Capital Purposes

Councils receive various capital grants and contributions that are nearly always 100% specific in nature.

Due to the fact that they are specifically allocated in respect of capital expenditure they are excluded from

the operational result for a council in TCorp’s analysis of a council’s financial position.

Grants and Contributions for Operating Purposes

General purpose grants are distributed through the NSW Local Government Grants Commission. When

distributing the general component each council receives a minimum amount, which would be the

amount if 30% of all funds were allocated on a per capita basis. When distributing the other 70%, the

Grants Commission attempts to assess the extent of relative disadvantage between councils. The

approach taken considers cost disadvantage in the provision of services on the one hand and an

assessment of revenue raising capacity on the other.

Councils also receive specific operating grants for one-off specific projects that are distributed to be spent

directly on the project that the funding was allocated to.

Independent Commission Against Corruption (ICAC)

ICAC was established by the NSW Government in 1989 in response to growing community concern

about the integrity of public administration in NSW.

The jurisdiction of the ICAC extends to all NSW public sector agencies (except the NSW Police Force)

and employees, including government departments, local councils, members of Parliament, ministers,

the judiciary and the governor. The ICAC's jurisdiction also extends to those performing public official

functions.

Independent Pricing and Regulatory Tribunal (IPART)

IPART has four main functions relating to the 152 local councils in NSW. Each year, IPART determines

the rate peg, or the allowable annual increase in general income for councils. They also review and

determine council applications for increases in general income above the rate peg, known as “Special

Rate Variations”. They approve increases in council minimum rates. They also review council

development contributions plans that propose contribution levels that exceed caps set by the

Government.

Infrastructure Backlog

Infrastructure backlog is defined as the estimated cost to bring buildings, infrastructure, and other

structures to a satisfactory standard, measured at a particular point in time. It is unaudited and stated

within Special Schedule 7 that accompanies the council’s audited annual financial statements.

Integrated Planning and Reporting (IP&R) Framework

http://en.wikipedia.org/wiki/Acronym

http://en.wikipedia.org/wiki/Profit_(accounting)

http://en.wikipedia.org/wiki/Interest

http://en.wikipedia.org/wiki/Taxes

http://en.wikipedia.org/wiki/Depreciation

http://en.wikipedia.org/wiki/Amortization_(tax_law)


As part of the NSW Government’s commitment to a strong and sustainable local government system, the

Local Government Amendment (Planning and Reporting) Act 2009 was assented on 1 October 2009.

From this legislative reform the IP&R framework was devised to replace the former Management Plan

and Social Plan with an integrated framework. It also includes a new requirement to prepare a long-term

Community Strategic Plan and Resourcing Strategy. The other essential elements of the new framework

are a Long-Term Financial Plan (LTFP), Operational Plan and Delivery Program and an Asset

Management Plan.

Local Government Cost Index (LGCI)

The LGCI is a measure of movements in the unit costs incurred by NSW councils for ordinary council

activities funded from general rate revenue. The LGCI is designed to measure how much the price of a

fixed “basket” of inputs acquired by councils in a given period compares with the price of the same set of

inputs in the base period. The LGCI is measured by IPART.

Net Assets

Net Assets is measured as total assets less total liabilities. The Asset Revaluations over the past years

have resulted in a high level of volatility in many councils’ Net Assets figure. Consequently, in the short

term the value of Net Assets is not necessarily an informative indicator of performance. In the medium to

long term however, this is a key indicator of a council’s capacity to add value to its operations. Over time,

Net Assets should increase at least in line with inflation plus an allowance for increased population and/or

improved or increased services. Declining Net Assets is a key indicator of the council’s assets not being

able to sustain ongoing operations.

Roads and Maritime Services (RMS)

The NSW State Government agency with responsibility for roads and maritime services, formerly the

Roads and Traffic Authority (RTA).

Section 64 Contribution

Development Servicing Plans (DSPs) are made under the provisions of Section 64 of the Local

Government Act 1993 and Sections 305 to 307 of the Water Management Act 2000.

DSPs outline the developer charges applicable to developments for Water, Sewer and Stormwater

within each Local Government Area.

Section 94 Contribution

Section 94 of the Environmental Planning and Assessment Act 1979 allows councils to collect

contributions from the development of land in order to help meet the additional demand for community

and open space facilities generated by that development.

It is a monetary contribution levied on developers at the development application stage to help pay for

additional community facilities and/or infrastructure such as provision of libraries; community facilities;

open space; roads; drainage; and the provision of car parking in commercial areas.


The contribution is determined based on a formula which should be contained in each council's

Section 94 Contribution Plan, which also identifies the basis for levying the contributions and the works

to be undertaken with the funds raised.

Special Rate Variation (SRV)

A SRV allows councils to increase general income above the rate peg, under the provisions of the Local

Government Act 1993. There are two types of special rate variations that a council may apply for:

a single year variation (section 508(2)) or

a multi-year variation for between two to seven years (section 508A).

The applications are reviewed and approved by IPART.


Ratio Explanations

Asset Maintenance Ratio

Benchmark = Greater than 1.0x

Ratio = actual asset maintenance / required asset maintenance

This ratio compares actual versus required annual asset maintenance, as detailed in Special Schedule 7.

A ratio of above 1.0x indicates that the council is investing enough funds within the year to stop the

infrastructure backlog from growing.

Building and Infrastructure Renewals Ratio


Ratio = Asset renewals / depreciation of building and infrastructure assets

This ratio compares the proportion spent on infrastructure asset renewals and the asset’s deterioration

measured by its accounting depreciation. Asset renewal represents the replacement or refurbishment of

existing assets to an equivalent capacity or performance as opposed to the acquisition of new assets or

the refurbishment of old assets that increase capacity or performance.

Cash Expense Cover Ratio

Benchmark = Greater than 3.0 months

Ratio = current year’s cash and cash equivalents / total expenses – depreciation – interest costs

This liquidity ratio indicates the number of months a council can continue paying for its immediate

expenses without additional cash inflow.

Capital Expenditure Ratio


Ratio = annual capital expenditure / annual depreciation

This indicates the extent to which a council is forecasting to expand its asset base with capital

expenditure spent on both new assets, and replacement and renewal of existing assets.

Debt Service Cover Ratio (DSCR)


Ratio = operating results before interest and depreciation (EBITDA) / principal repayments (from the

statement of cash flows) + borrowing interest costs (from the income statement)

This ratio measures the availability of cash to service debt including interest, principal and lease

payments


Infrastructure Backlog Ratio

Benchmark = Less than 0.02x

Ratio = estimated cost to bring assets to a satisfactory condition (from Special Schedule 7) / total

infrastructure assets (from Special Schedule 7)

This ratio shows what proportion the backlog is against total value of a council’s infrastructure.

Interest Cover Ratio


Ratio = EBITDA / interest expense (from the income statement)

This ratio indicates the extent to which a council can service its interest bearing debt and take on

additional borrowings. It measures the burden of the current interest expense upon a council’s operating

cash.

Operating Ratio

Benchmark = Better than negative 4%

Ratio = (operating revenue excluding capital grants and contributions – operating expenses) / operating

revenue excluding capital grants and contributions

This ratio measures a council’s ability to contain operating expenditure within operating revenue.

Own Source Operating Revenue Ratio

Benchmark = Greater than 60%

Ratio = rates, utilities and charges / total operating revenue (inclusive of capital grants and contributions)

This ratio measures the level of a council’s fiscal flexibility. It is the degree of reliance on external funding

sources such as operating grants and contributions. A council’s financial flexibility improves the higher the

level of its own source revenue.

Unrestricted Current Ratio

Benchmark = 1.5x (taken from the IPART December 2009 Revenue Framework for Local Government

report)

Ratio = Current assets less all external restrictions / current liabilities less specific purpose liabilities

Restrictions placed on various funding sources (e.g. Section 94 developer contributions, RMS

contributions) complicate the traditional current ratio because cash allocated to specific projects are

restricted and cannot be used to meet a council’s other operating and borrowing costs. The Unrestricted

Current Ratio is specific to local government and is designed to represent a council’s ability to meet debt

payments as they fall due.

Documents

Port Macquarie Hastings Council Financial …...Port Macquarie Hastings Council Financial Assessment and Benchmarking Report 8 October 2012 Prepared by NSW Treasury Corporation as