Financial Sustainability in Local Government
The Queensland state government defines financial sustainability for local government as:
“A local government is financially sustainable if the local government is able to maintain its financial capital and infrastructure capital over the long-term.”
The below video from the City of Ryde discusses the financial challenges facing Councils. While the City of Ryde is in New South Wales and subject to rate capping by the New South Wales state government, the issues of managing community expectations, prioritising, sustainablity and infrastructure planning are the same for Queensland Councils.
Measuring and monitoring Financial Sustainability
The Queensland State Government provides a Financial Management (Sustainability) Guideline. This guideline explains sustainability and provides guidance for calculating financial sustainability measures including Asset Sustainability Ratio, Operating Surplus Ratio and Net Financial Liabilities Ratio. Legislation requires Queensland Councils publish these ratios.
Operating Surplus Ratio
Measures the extent to which revenues raised cover operational expenses only or are available for capital funding purposes or other purposes. Calculation: Net result divided by total operating revenue, expressed as a %. Target: between 0% and 10%. A negative result indicates an operating deficit and the larger the negative percentage the worse the result.*
Net Financial Liabilities Ratio
Measures the extent to which the net financial liabilities of Council can be repaid from operating revenues. Calculation: (total liabilities less current assets) divided by total operating revenue, expressed as a %. Target: not greater than 60%. A ratio greater than 60 per centre of operating revenue indicates the Council has limited capabilty to increase loan borrowings and may experience stress in servicing current debt.*
Asset Sustainability Ratio
This ratio reflects the extent to which the infrastructure assets managed by Council are being replaced as they reach the end of their useful lives. Calculation: capital expenditure on the replacement of infrastructure assets (renewals) divided by depreciation expense, expressed as a %. Target: greater than 90%. A low percentage may indicate that the asset base is relatively new (as may result from rectifying extensive natural disaster damage) and does not require replacement, the lower the percentage, the more likely it is that the council has inadequate asset management plans and practices.*
A Council comparison
The table below shows data for four Councils showing how the ratios allow easy benchmarking between Councils.
The data shows that Cairns (3%) and Sunshine Coast (3.5%) have a surplus, Noosa Council (0.1%) has a tiny surplus and newly deamalgamated Livingstone (-12.4%) has a deficit. Continually running deficits makes it difficult to maintain service levels and community infrastructure.
Both Noosa (1.4%) and Cairns (10.9%) have a low net financial liabilities ratio meaning they have opportunities to borrow more. Livingstone (84.3%) is well over the 60% target restricting its capablity to increase borrowing. In Queensland under the Statutory Bodies Financial Arrangements Act 1982 the state treasurer must approve Council borrowings meaning Councils with poor ratios may have difficulty obtaining approval for increased debt.
Noosa (100%) is replacing assets at the highest rate and Cairns (89.25%) is almost meeting the target minimium of 90% assets being replaced at the end of their useful lives. Both the Sunshine Coast (67%) and Livingstone Councils (47%) are lagging in replacing assets. If not due to a new asset base, this will cause significant future expenditure to catch up causing higher debt levels for future generations. Operation of assets past useful lives could cause public amenity issues (for example dilapidated buildings) or high failure rates (for example pipe or culvert failures) or increased public risk (for example traffic accidents or falls).
Cost Shifting
Cost shifting, or transferring responsibility to Local Government from other governments or agencies or removing funding is a problem in Local Government. For examples of the wide range of services and responsibilities being transferred to Local Government, see the submissions to the Federal inquiry that examined this issue:
Appendix C: Cost Shifting Examples of the Australian Parliamentary Inquiry into Local Government and Cost Shifting
Further reading:
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* For more information on the state of Council financial sustainability see section 6 of the Queensland Audit Office Results of audit: Local Government entities 2013-14. This report assesses Councils, compares Councils by type, supplies key findings and recommendations. The report identified that sixteen Councils were at a higher risk of being unsustainable, predominately indigenous Councils or high population growth areas.
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Factors Impacting Local Government Financial Sustainability: A Council Segment Approach by the Local Government Association of Queensland looks at financial problems and the relevant solutions.