The QPR Blog

In December 2011, the Department of Local Government engaged TCorp to assist with the development of the NSW government’s Local Infrastructure Renewal Scheme (LIRS). The LIRS initiative seeks to assist in addressing Councils’ ‘Infrastructure Backlog’ by providing Councils with an interest rate subsidy on borrowings from the private sector for the funding of qualifying projects.

Infrastructure Backlog is effectively the investment required to bring a Council’s infrastructure up to a ‘satisfactory’ standard, being the level at which an asset can perform at the standards usually expected for that asset in terms of its age and use. Council’s infrastructure assets include items such as council owned buildings, parks, footpaths, roads and bridges.

In March 2012, the Minister for Local Government announced the establishment of an Independent Local Government Review Panel (Review Panel). The Review Panel is developing options to improve the strength and effectiveness of local government in NSW. Included under the Review Panel’s Terms of Reference is consideration of the financial sustainability of each Local Government Area (LGA).

TCorp has now prepared reports for all 152 NSW Councils, the results of which have been presented in its recently released paper on the Financial Sustainability of the New South Wales Local Government Sector.

TCorp’s key tasks in undertaking this exercise included:

• Creating a definition of sustainability;
• Establishing a set of appropriate benchmark indicators;
• Developing an assessment methodology including a rating scale and Outlook that could be used to compare Councils against a sustainability definition;
• Reviewing both historical financial results and the long term (10 year) financial forecasts of each Council.

Taking a long term view of the effect ongoing change could have on a Council’s operating position and service levels, the TCorp report offers the following definition of sustainability:

The TCorp report allocates a Financial Sustainability Rating (FSR) and Outlook to each individual Council. The FSR provides an assessment of each Council’s current long term rating, using seven rating bands: Very Strong, Strong, Sound, Moderate, Weak, Very Weak, and Distressed. In addition to this, the Outlook, identified as Positive, Neutral or Negative, is the assessment of the likely movement in a Council’s FSR over the next three years.

TCorp considers that a Council needs to be assessed at a Moderate or higher level to be acceptable in terms of their sustainability. A Moderate level FSR is on average equivalent to marginally exceeding the benchmarks utilised in TCorp’s assessment process.

A Positive Outlook indicates that a Council’s FSR is likely to improve in the short term, whilst a Neutral Outlook indicates that the FSR is likely to remain unchanged. A Negative Outlook indicates that a Council’s FSR is more likely to deteriorate, and is a sign of a general weakening in performance and sustainability.

A Council with an FSR of Moderate and an Outlook of Negative, is assessed as being in a deteriorating position or at risk of being downgraded from Moderate to Weak. As TCorp considers a FSR of lower than Moderate to be at much greater risk of being unsustainable, Councils in this position need to be urgently considering options for addressing the areas of poor performance that are contributing to Council’s assessed FSR and Outlook.

Overall Results

The current FSR distribution for the 152 Councils in NSW is presented below:

The results illustrate that 113 (74.3%) of the 152 Councils are currently rated Moderate or better, and 39 (25.7%) are rated Weak or Very Weak. A Moderate rating indicates that a Council has an adequate capacity to meet its financial obligations in the short to medium term (being the next five years), and to manage risks to its business. A Council rated as Moderate is likely to have recorded some minor to moderate operating deficits and it may have also recently recorded a significant operating deficit. It is likely to be able to address any unforseen financial shocks with moderate revenue and/or expense adjustments. Achieving a Moderate level FSR is considered to be the base target level for Councils and those Councils with a FSR higher than Moderate are in a much stronger position to deliver services, manage their assets and risks and address their Infrastructure Backlogs. Councils rated as Moderate will generally not have sufficient funds to address their Infrastructure Backlogs.

No Councils were assigned an FSR of Very Strong or Distressed.

The Outlook distribution for the 152 Councils in NSW is presented below:

Analysis of of these forecast results reveals a number of factors that are driving TCorp’s perception of the expected continued deterioration in the financial rating of many local Councils. These factors include:

• The inability of many Councils to achieve a breakeven or surplus operating position;
• The introduction of the IP&R process has increased the Councils’ focus on the longer term, rather than just the next 12 month budget period and this has identified longer term trends and issues;
• The AMP, introduced as part of the IP&R, has required Councils to consider the whole of life costs associated with their infrastructure assets and has highlighted the costs associated with renewing assets;
• The AMP has also highlighted the underspending on the maintenance of assets, which can lead to a declining quality of assets, reflected in an increased Infrastructure Backlog;
• Changes in demographics where some LGAs are experiencing declining populations, whilst others are experiencing strong population growth.

Local Results

The current financial sustainability assessments of Palerang and its immediate neighbours are as follows: