National Financial Sustainability Study of Local Government (PWC ...

National Financial Sustainability Study of Local Government Commissioned by the Australian Local Government Association November 2006

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Disclaimer This Report has been prepared by PricewaterhouseCoopers (PwC) at the request of the Australian Local Government Association (ALGA) in our capacity as advisors in accordance with the Terms of Reference and the Terms and Conditions contained in the Consultant Agreement between ALGA and PwC. The information, statements, statistics and commentary (together the “Information”) contained in this report have been prepared by PwC from publicly available material and from discussions held with stakeholders. The Consultants may in their absolute discretion, but without being under any obligation to do so, update, amend or supplement this document. PwC have based this report on information received or obtained, on the basis that such information is accurate and, where it is represented by management as such, complete. The Information contained in this report has not been subject to an Audit. The information must not be copied, reproduced, distributed, or used, in whole or in part, for any purpose other than detailed in our Consultant Agreement without the written permission of ALGA and PwC. Comments and queries can be directed to:

Scott Lennon Partner – Infrastructure Government & Utilities PricewaterhouseCoopers 201 Sussex Street Sydney NSW 2000 Phone: (02) 8266 2765 Email: [email protected]

Photo credits Cover page photos all from relevant local council websites and feature: • Blacktown library (NSW) • Brisbane Botanic Gardens (Qld) • Redfern Community Centre (NSW), and • Alice Springs Swimming Centre (NT).

Acronyms Acronym

Meaning

ABS

Australian Bureau of Statistics

ACLG

Australian Classification of Local Governments

ACT

Australian Capital Territory

ALGA

Australian Local Government Association

AMP

asset management plan

CFO

Chief Financial Officer

CGC

Commonwealth Grants Commission

CPI

Consumer Price Index

DOTARS

Department of Transport and Regional Services (Commonwealth)

EU

European Union

FAGs

Financial Assistance Grants

FAGs Act

Local Government (Financial Assistance) Act 1995 (Cth)

GDP

gross domestic product

GST

goods and services tax

LCIRF

Local Community Infrastructure Renewals Fund

LGANT

Local Government Association of the Northern Territory

LGAQ

Local Government Association of Queensland

LGASA

Local Government Association of South Australia

LGAT

Local Government Association of Tasmania

LGB

Local Governing Body

LGGC

Local Government Grants Commission

LGIS

Local Government Infrastructure Services, Qld

MAV

Municipal Association of Victoria

MPMP

Municipal Performance Measurement Program in Ontario, Canada.

NCC

National Competition Council

NCP

National Competition Policy

NSW

New South Wales

NSW LGSA

NSW Local Government and Shires Association

NT

Northern Territory

NZ

New Zealand

PwC

PricewaterhouseCoopers

Qld

Queensland

QTC

Queensland Treasury Corporation

Acronym

Meaning

RA

Rural Agricultural (ACLG category)

RS

Rural Significant Growth (ACLG category)

RT

Rural Remote (ACLG category)

R2R

Roads to Recovery Funding Program

SA

South Australia

SCEFPA

Standing Committee on Economics, Finance and Public Administration

SPP

Specific Purpose Payments

SSS

Qld “Size, Shape and Sustainability” Review

Tas

Tasmania

UC

Urban Capital City (ACLG category)

UCV

Unimproved Capital Value

UF

Urban Fringe (ACLG category)

UM

Urban Metropolitan Developed (ACLG category)

UR

Urban Regional Towns/City

UK

United Kingdom

WA

Western Australia

WALGA

Western Australia Local Government Association


Contents Executive Summary

3

1

Introduction

18

2

Overview of the local government sector

41

3

Financial governance and fiscal relationships

87

4

Analysis of financial sustainability of local government

95

5

Potential options for reform

119

6

Conclusions and recommendations

150

Appendix A

Terms of Reference

157

Appendix B

Definition of Financial Sustainability Indicators

159


Executive Summary The Australian Local Government Association (ALGA) has commissioned PricewaterhouseCoopers (PwC) to undertake an independent analysis of the financial sustainability of local government in Australia. The full terms of reference and scope are provided in Appendix A. The objective of this study is to assist ALGA, in collaboration with state and territory local government associations, to develop a detailed plan to: •

enable councils to better meet their fiscal obligations as well as the growing demands for infrastructure and services, and

•

provide a sound approach for targeted support to local government for consideration by other spheres of government.

In summary, the terms of reference for this study require PwC to: •

assess the current and long-term viability of the local government nationally and by council types including the trends and differences,

•

identify the key financial issues affecting financial sustainability,

•

develop recommendations for improved financial sustainability (eg financial skills and potential sources of additional revenue), and

•

investigate the merit of reforming intergovernmental funding to develop a new model to improve sustainability.

The intention of this project is to provide a high level strategic national study that draws on the detailed analysis of a number of state based sustainability studies, in order to provide an indication of the sustainability of the nationwide local government sector. The resources available to complete this study preclude an in-depth and individual analysis of each of the 700 councils. The diversity of the sector also makes it difficult to provide a detailed “how to” guide for improving sustainability that would apply to the varying circumstances of each council. Therefore, this study assesses key characteristics that contribute to the councils currently at risk of sustainability problems, and develops a range of internal and funding reform options that target these issues to improve the longterm sustainability of the sector as a whole.

Background Context of Local Government Local government in Australia is a dynamic and diverse sector that combines the individual character and operations of councils.

Executive Summary

3


Councils are very diverse in size and shape from Brisbane City Council (population 950,000 and annual expenditure of approximately $1.7 billion) to very small councils like Jerilderie Shire (population 1,908 and annual expenditure $6.8 million). Consistent with these diverse characteristics, the financial position of individual councils also varies substantially. Local government plays an integral role in the Australian economy and within local communities. In terms of economic activity, local government has an annual expenditure of over $20 billion, which represents around 2% of GDP, and employs around 1.3% of the Australian labour force. Moreover, local government provides a significant proportion of the essential services and infrastructure that underpins all local and regional communities. For the numerous regional and more remote communities local government is often the only institutional presence and one of the key drivers of economic activity. The key benefits of the local government sector, as outlined by the Australian Government1, include that the sector’s: •

wide and established national network of public administration, including a significant presence in rural and regional Australia

•

strong links to the community and that it is accountable to the communities it represents

•

practical service orientation and good organisational skills, which make it capable of innovative, speedy and flexible responses

•

deep links with local business and industry, which put councils in a good position to foster a ‘bottom up’ approach to regional development

•

ability to provide information to support Commonwealth regional policy development and implementation, and

•

function as an ideal entry point for access to information about other governments’ services and programs.

Increase in local government service scope Over the past thirty years, the functions undertaken by local government in Australia have evolved with a generally expanded scope. Council services now generally include a range of social and human services in addition to the physical infrastructure of roads and waste, with some jurisdictions also providing water and waste water. Most local councils, due to community pressure, state and Australian Government inducements and the withdrawal of services by other levels of government, now provide a growing range of social and human services. Some smaller councils, due to constrained budgets have, by necessity, needed to contain their scope to the traditional services. The Intergovernmental Agreement on Cost Shifting, coupled with greater caution by councils prior to expanding services, may moderate recent levels of service expansion.

1

DOTARS, Submission No. 103., p. 39., in House of Representatives, SCEFPA, 2003, Rates and Taxes: A Fair Share for Responsible Local Government, p. 91

Executive Summary

4


This diversity in size and subsequent income streams has meant that councils have differing capacities to fund the requests by their communities for greater services. Managing these demands is particularly challenging for many councils that have a narrow revenue base or a revenue base that has seen only modest growth. Particularly for the 60% of councils that are rural and remote councils, of which many have experienced static or declining population bases, this translates to stable or declining council revenue. This is an ongoing challenge in the context of strong economic growth, which typically sees communities demanding a corresponding increase in local infrastructure and services. Consequently, individual councils have had mixed success in managing and funding community demands for more services whilst retaining a healthy financial position.

Efficiency improvements Over the past decade there has been growing awareness and progress across the sector about the need to improve the efficiency and sustainability of local government. As such a large body of work has been undertaken over recent years, driven by state associations in addition to state and Australian Governments that analyses the sector and compiles evidence that a large number of councils are facing financial difficulties. This is part of an ongoing process of ensuring that there is a robust understanding of sustainability issues at the state and federal level. As a consequence, over the past decade a number of councils have implemented a range of successful reforms to improve their efficiency and sustainability. Significant efficiency reforms have been achieved through the following approaches: •

outsourcing non-core operations, which was formalised in Victoria by the compulsory competitive tending (CCT) policy during the 1990s

•

structural reforms that have included mandatory and voluntary amalgamations in New South Wales (NSW), Queensland, Victoria, South Australia (SA) and Tasmania to consolidate the local government sector

•

commercialisation of services in order to increase the returns to local government, for example, the recent Local Government Infrastructure Services initiative in Queensland (see section 2.6 for further details)

•

regional service delivery is a widespread practice among councils to deliver a range of services such as waste services, purchasing and procurement, road and infrastructure maintenance, and recruitment, and

•

shared services where either a council or the state association becomes the lead provider for service provision, particularly for corporate services such as finance, and HR.

State based sustainability studies The results of recently completed sustainability studies commissioned and funded by state local government associations in NSW, SA and Western Australia (WA) provided some of the impetus for this study. Each of these studies was managed by an independent board, with the analysis undertaken by Access Economics (Access). SA was the first state to complete such a study, with the results published in August 2005. This was followed by NSW (May 2006) and then the WA report in August 2006.

Executive Summary

5


The Municipal Association of Victoria (MAV) has also led the efficiency reform process undertaking considerable work on analysing the trends and long-term sustainability of local government finances in Victoria. The MAV has developed a viability index to measure the long-term viability of individual councils. It combines factors such as borrowings, unfunded superannuation liabilities (USL) and the cumulative deficit/surplus in capital expenditure versus depreciation. The MAV index analyses data since 1997-98 and compares this debt (both financial and any underspend on renewals) against rate revenues. Based on 2004-05 data MAV concluded that 10% of the 79 councils in Victoria are unsustainable. In collating the results of the MAV study and the three separate Access studies it appears that around 35% of councils across these states are not financially sustainable. Access found that the proportion of unsustainable councils varies between 25% in NSW and 58% in WA. However, in observing these results it is important to note that the Access approach excluded capital grants from the operating results, which paints a more urgent picture of the sustainability of local government. In this PwC study, capital grants are viewed as an ongoing and important revenue source, the exclusion of which can overstate the extent of sustainability difficulties of local government. Overall, this PwC Study is seeking to provide a strategic-level national assessment of the degree to which financial sustainability is a significant concern and, if so, to recommend options to assist councils in need.

Assessment of current and long-term viability of local government and the differences between types of councils The recent state based sustainability studies have confirmed widespread concerns from a number of commentators that a sizable proportion of councils face long-term financial sustainability problems. Where councils report operating deficits or, more specifically, operating cashflow deficits, there is a strong tendency to defer or scale back renewals expenditure to upgrade existing infrastructure. This deferral of renewals, particularly in community infrastructure (eg community centres, swimming pools, libraries), has been a key factor in creating a backlog of renewals work. This tendency by some councils to defer community infrastructure renewals arises because the other two broad categories of infrastructure (being water/sewerage and roads) have specific user charges to fund renewals or Australian Government grants (eg Roads to Recovery or R2R) to support periodic upgrading. Even with R2R a sizable proportion of rural councils still have ongoing challenges funding the adequate renewal of their local roads. Our ability to accurately assess the financial viability and sustainability of different types of councils across Australia has been constrained by a range of data limitations, including: •

mixed approaches to measuring and recording financial data associated with inconsistencies between states,

•

the infrequent asset re-valuations (typically 5 yearly) as well as differences in assumed asset lives impacting the accuracy of reported depreciation levels, and

Executive Summary

6


•

incomplete financial and asset management records particularly for smaller councils, including a large proportion of Northern Territory councils. A key data shortcoming across a large proportion of councils across the nation is accurate information on capital expenditure and renewals expenditure and inconsistent separation of maintenance, renewals and capital expenditure.

PwC has subsequently utilised two approaches to assess viability, namely: i.

Financial ratio analysis using a survey of 100 councils: PwC has obtained data from state/territory grants commissions which was then stratified to match both the proportion of councils per state/territory and the proportion of councils in each of seven Australian Classification of Local Governments (ACLG) size categories established by the Department of Regional Transport and Services (DOTARS).

ii.

Extrapolation from state based sustainability results: from the three Access based inquiries (NSW, SA and WA) and MAV study in Victoria, PwC has extrapolated to provide an indicative estimate of the national sustainability gap and infrastructure backlog. The Access approach used a more sophisticated method to defining financial sustainability based on forward looking renewals and own-source revenue capacity. Similarly, MAV was able to obtain a better breakdown of capital expenditure directly from councils so as to estimate the likely infrastructure backlog and has examined the trends in Victorian financial viability over the medium term. Extrapolation is required as this PwC Study has a strategic or national focus and the scope does not encompass detailed individual council analysis as utilised by the state based studies to evaluate sustainability.

Executive Summary

7


Financial ratio analysis Table E.1 provides a summary of a survey of the financial viability of 100 councils within the seven ACLG size categories developed by DOTARS. A full explanation and definition of these financial key performance indicators (KPI) can be found in Appendix B. Table E.1: Summary of financial KPIs by ACLG % Councils with Deficit greater than 10% of Total Revenue

Median Sustainability Ratio

(EBIT/borrowing costs)

Median Operating Surplus as a % of Total Revenue

% Councils with Sustainability Ratio