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Walcha Council

Walcha Council

Financial Assessment, Sustainability and Benchmarking Report

21 March 2013

Prepared by NSW Treasury Corporation for Walcha Council as part of the Local Infrastructure

Renewal Scheme and for the Division of Local Government and the Independent Local

Government Review Panel.

Walcha Council

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 and to assist the DLG and the

Independent Local Government Review Panel in its consideration of the Sustainability of each local

government area in NSW.

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, and Council’s future Sustainability, within prudent risk parameters and

the limits of its financial projections.

The report has been prepared for Walcha Council, the LIRS Assessment Panel, the DLG and the

Independent Local Government Review Panel. TCorp shall not be liable to Walcha 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.

Walcha Council

Index

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

Section 2 Introduction ................................................................................................................... 6

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 ...................................................................................................................... 12

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

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

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

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

3.6(a): Infrastructure Backlog ................................................................................................... 16

3.6(b): Infrastructure Status ...................................................................................................... 17

3.6(c): Capital Program ............................................................................................................ 18

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

4.6 Sustainability ................................................................................................................. 28

Section 5 Benchmarking and Comparisons with Other Councils ...................................................... 29

Section 6 Conclusion and Recommendations .................................................................................. 35

Appendix A Historical Financial Information Tables ................................................................... 36

Appendix B Glossary ................................................................................................................. 39

Walcha Council

Section 1 Executive Summary

This report provides an independent assessment of Walcha Council’s (the Council) financial capacity,

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 one application for the replacement of Woolbrook Bridge for $0.6m borrowings to be

repaid over 10 years.

TCorp’s approach has been to:

Review the most recent reviews 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 project is being funded from the General Fund so we

focused our review on the General Fund.

Based on the following observations of the Council’s financial performance over the review period,

Council management has not been able to prevent a deteriorating financial position:

The general trend in net operating results excluding capital grants and contributions for the

review period has been downward

Council’s EBITDA has decreased over the review period

When the Asset Revaluations are excluded, the underlying trend over the review period has

been a declining Infrastructure, Property, Plant and Equipment (IPP&E) asset base with asset

purchases being less than the combined value of disposed assets and annual depreciation

Council’s reported Infrastructure Backlog of $16.5m in 2012 represents 10.2% of its infrastructure asset

value of $161.5m. Other observations include:

Council’s Infrastructure Backlog valuation is dominated by roads (89.2%) and has increased

by $3.3m since the Asset Revaluations process.

Walcha Council

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

The Operating Ratio is consistently well below the benchmark and below a level of negative

30.0% from 2013

With the exception of 2014 Council’s Unrestricted Current Ratio is below benchmark each

year of the forecast period. It is at the lowest position of 0.73x in 2017

Council’s Capital Expenditure Ratio is below benchmark for the entire forecast period

The Own Source Operating Revenue Ratio is above benchmark over the forecast period

The Cash Expense Ratio is forecast to be near benchmark in 2013 and 2014 and declines to

the lowest point of 1.7 months. This indicates that Council has limited financial flexibility to

withstand unexpected events.

In our view Council has the capacity to undertake the additional borrowings of $0.6m for the

Woodbrook Bridge LIRS project, but Council needs to review and carefully manage its medium liquidity

issues. This is based on the following analysis:

The DSCR is well above benchmark of 2.00x each year of the 10 year forecast indicating that Council should have the capacity to meet its debt obligations

The Interest Cover Ratio is also above benchmark for the entire forecast period

A review of its liquidity position in the medium term is vital to ensure Council can meet its operating cash flows

In terms of Council’s Sustainability, TCorp believes Council is in a weak position and based on the

current LTFP this position is likely to deteriorate in the future. This will lead to Council being

unsustainable if corrective action is not taken.

In respect of the long term sustainability of the Council our key observations are:

Council’s operating result, excluding capital grants and contributions, has shown a deficit

position in each year of the review period

Council’s current LTFP forecasts operating deficits, excluding capital grants and contributions,

for the entire period. The result improves over the 10 year period

Council has maintained conservative levels of borrowings which is reflected in their DSCR

and Interest Cover Ratio

Council needs to increase its expenditure on asset maintenance and renewals in order to

prevent the Infrastructure Backlog from increasing

Walcha Council

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

consolidated basis, with other Councils in DLG Group 9. The key observations are:

Council’s financial flexibility is weak as indicated by the Own Source Operating Revenue

Ratio and Operating Ratio being below benchmark over the review period. While the Own

Source Revenue Ratio is forecast to increase marginally above benchmark in the medium

term the Operating Ratio is forecast to remain below benchmark and its peer group

Council was in a sound liquidity position indicated by the Cash Expense Ratio tracking

benchmark levels and maintaining this level in the medium term and the Unrestricted Current

Ratio above benchmark over the period

Council’s DSCR and Interest Cover Ratio were above benchmark and tracked the group

average since 2011. The ratios are forecast to remain at this level in the medium term

Council’s Infrastructure Backlog was in line with its peer group but above benchmark

The Asset Maintenance Ratio tracked benchmark and the group average. The Building and

Infrastructure Asset Renewal and Capital Expenditure Ratios generally tracked the group

average but were below benchmark since 2010. Council’s Capital Expenditure Ratio is

forecast to remain at this level in the medium term.

Walcha Council

Section 2 Introduction

2.1: Purpose of Report

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

Sustainability and performance measured against a peer group of councils. It will complement

Council’s internal due diligence, the IP&R system of the Council and the DLG, together with the work

being undertaken by the Independent Local Government Review Panel.

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 long term Sustainability of the Council

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 four 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 2011/12)

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

Walcha Council

In completing the report, TCorp worked closely with Council management to analyse and understand

the information gathered. The Council was given a draft copy of the report for their review and

comment. Based on our discussions with Council:

Council agrees with the findings based on the LTFP model that was analysed

Council acknowledges that it needs to improve its operating results and capital expenditure

ratio.

In terms of addressing medium term liquidity issues Council feels that these will be addressed

in future LTFP’s

Since receiving the draft TCorp report Council staff have undertaken further analysis on some

the figures underlying the key financial ratios to check for accuracy. This process has

identified a number of corrections that will be incorporated into future LTFP’s.

Council believes these adjustments will address all the liquidity issues noted in the TCorp

report

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

Walcha Council

2.3: Overview of the Local Government Area

Walcha Shire Council

Locality and Size

Locality Northern

Area 6,266 km²

DLG Group No. 9

Demographics

Population 3,021

% under 20 24.6%

% between 20 and 59 46.3%

% over 60 29.1%

Expected population in 2021 2,840

Operations

Number of employees (FTE) 71

Annual revenue $11.5m

Infrastructure

Bridges 91

Roads 915km

Infrastructure backlog value $16.5m

Total infrastructure value $161.5m

The Walcha Shire is located in the New England Tablelands region of New South Wales. Within the

Shire boundary lie the villages of Yarrowitch, Nowendoc, Walcha Road and Woolbrook. Walcha also

services the village of Niangala.

The town of Walcha is 1,067 metres above sea level, and can be reached by road, rail and air. With

some 146,000 ha of national park and wilderness in the Shire, including parts of the world heritage

listed central eastern rainforest reserves, a network of excellent trout waters; Walcha provides eco-

experience tourism. Walcha is one of the most productive agricultural areas in NSW, a major

hardwood timber supplier and is a significant supplier of softwood.

Walcha Council

2.4: LIRS Application

Council has made one LIRS application.

Project: Replacement of Woolbrook Bridge

Description: Construction of a new concrete bridge over the Macdonald River at Woolbrook costing

$1.2m. This is a joint project with Tamworth Council and the cost is split equally between both

Councils. The project will remove the load limited bridge which is currently affecting functionality of the

road network and having a high level of community impact.

Amount of loan facility: $0.6m

Term of loan facility: 10 years

Walcha Council

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

Total revenue, excluding capital grants and contributions, increased by 26.2% to $11.5m over

the review period. When compounded, this equates to an 8.1% p.a. increase.

Council rates have grown in line with standard rate increments over this period.

Rates and annual charges have been increasing by an average of 7.9% p.a. over the period

due to increasing water and sewerage annual charges.

User fees and charges have been trending higher over the period with a significant increase

in 2012 due to a $0.3m (38.6%) increase in private works and a $0.3m (22.6%) increase in

other fees and charges due to increased RMS charges.

Interest and Investment revenue has trended higher over the period due to increasing

deposits and increases in the weighted average interest rate across the investment portfolio.

The Federal Government brought forward one-half of the estimated 2013 local government

Financial Assistance Grant (FAG) allocations for payment in the 2012 financial year. A similar

arrangement applied in 2011 but only one quarter of the following year’s grant allocations

were paid in advance. As a result the amount of Council’s FAG paid in advance in 2012 was

$0.8m compared to $0.4m in 2011.

3,699 3,584 3,439 2,942

3,4022,719 2,784

2,603

240241 153

0

3,955

2,892 3,1013,399

231

238 174190

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2012 2011 2010 2009

Figure 1 - Revenue Sources for 2008/09 to 2011/12 ($'000s)

Rates and annual charges User charges and fees

Interest and investment revenue Grants and contributions for operating purposes

Other revenues

Walcha Council

3.2: Expenses

Key Observations

Total expenses have been growing at an average of 13.3% p.a. over the period mainly due to

increased employee expenses, and materials and contract expenses.

Employee costs have been increasing by an average of 10.5% p.a. over the period. While

employee numbers have increased by 7 to 71 over the period, there have also been

increases of $0.2m in superannuation costs and a $0.4m increase in employee leave

entitlement costs since 2009 (due to correction of errors in previous years provision

calculations).

Materials and contract expenses have been trending higher over the period and increased

14.8% in 2012 due to a $0.8m increase in raw materials and consumables cost, and a $0.5m

increase in contractor and consultancy costs both driven by increased RMS works which were

offset by fees and contributions received.

Depreciation and amortisation increased by 79.3% in 2011 as a result of Asset Revaluations,

but declined by 2.5% in 2012 as Council revised their Asset Management Strategy and the

useful lives of Council assets.

4,978 4,285 4,192 3,685

3030 11

87

4,643

3,438 3,302 3,363

4,286

4,398

2,4532,103

887

970

852950

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2012 2011 2010 2009

Figure 2 - Expenses for 2008/09 to 2011/12 ($'000s)

Employees Borrowing costs Materials and contract expenses

Depreciation and amortisation Other expenses

Walcha Council

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

The general trend in net operating results excluding capital grants and contributions for the

past reviews has been downward. The 2011 results were adversely affected by increased

depreciation charge.

Council expenses include a large non-cash depreciation expense ($4.3m in 2012), which has

increased substantially over the past three years following the Asset Revaluations. Whilst the

non-cash nature of depreciation can favourably impact on ratios such as EBITDA that focus

on cash, depreciation is an important expense as it represents the allocation of the value of

an asset over its useful life.

(3,297)(3,447)

(1,159)(1,054)

(2,448)

(1,386)

(315) (364)

(4,000)

(3,500)

(3,000)

(2,500)

(2,000)

(1,500)

(1,000)

(500)

0

2012 2011 2010 2009

Figure 3 - Operating Results for 2008/09 to 2011/12 ($'000s)

Operating result (excluding capital grants and contributions)

Operating result (including capital grants and contributions)

Walcha Council

3.4: Financial Management Indicators

Performance Indicators Year ended 30 June

2012 2011 2010 2009

EBITDA ($’000s) 1,019 981 1,305 1,136

Operating Ratio (28.6%) (35.6%) (12.0%) (11.5%)

Interest Cover Ratio 33.97x 32.70x 118.64x 13.06x

Debt Service Cover Ratio 14.56x 12.91x 23.30x 8.88x

Unrestricted Current Ratio 3.06x 4.30x 5.07x 4.02x

Own Sourced Revenue Ratio 57.4% 53.7% 59.3% 56.4%

Cash Expense Ratio 4.0 months 5.0 months 2.7 months 2.2 months

Net assets ($'000s) 352,264 357,316 357,830 134,664

Key Observations

Council’s EBITDA is marginally positive and has been static over the review period.

Council’s Interest Cover Ratio and DSCR indicate that they had flexibility in regard to carrying

a small amount of additional debt. Both ratios have been above their benchmarks over the

review period.

The Unrestricted Current Ratio has been well above the benchmarks in all reviews indicating

liquidity is sufficient.

The Cash Expense Ratio has been above benchmark for the past two years of the review

period.

The Own Source Operating Revenue Ratio has been below the benchmark in all years.

Net Assets have increased by $217.6m between 2009 and 2012 due to the Asset

Revaluations which increased the value of Council’s infrastructure assets and community

land.

The Asset Revaluations over the review period have resulted in some volatility in Net Assets.

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 the ongoing operations of Council.

When the Asset Revaluations are excluded, the underlying trend in all years of the review

period has been a declining Infrastructure, Property, Plant and Equipment (IPP&E) asset base

with asset purchases being less than the combined value of disposed assets and annual

depreciation. Over the review period this amounted to a $4.0m net decrease in IPP&E.

Council had $11,000 total borrowings outstanding in June 2012.

Walcha Council

3.5: Statement of Cashflows

Key Observations

In total, the Council had cash and investments of $3.9m ($3.5m in cash and equivalents) in

2012, up from $2.7m in 2009.

Within total cash and investments $2.3m is externally restricted, $0.9m is internally restricted

and $0.7m is unrestricted.

Approximately 9.0% of Council’s investment portfolio is subject to price risk, principally FRNs.

3,528 3,606

1,8501,457

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2012 2011 2010 2009

Figure 4 - Cash and Cash Equivalents for 2008/09 to 2011/12 ($'000s)

Walcha Council

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

Council’s reported Infrastructure Backlog of $16.5m in 2012 represents 10.2% of its infrastructure asset

value of $161.5m. Council’s Infrastructure Backlog is dominated by roads related Backlog (89.2%) and

has grown by $2.7m since the Asset Revaluations process.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Buildings and other

structures

Public roads (inc.

footpaths and car parks)

Water Sewerage Drainage works

Figure 5 - Infrastructure Backlog for 2008/09 to 2011/12($'000s)

2012 2011 2010 2009

2%

89%

3%6%

Figure 6 - Infrastructure Backlog Composition for 2011/12

Buildings and other structures

Public roads (inc. footpaths and car

parks)

Water

Sewerage

Drainage works

Walcha Council

Council has not completed their AMP’s at this stage and has advised that the current backlog is an

estimate only. Council anticipate that their AMP’s will be completed by March 2013.

3.6(b): Infrastructure Status

Infrastructure Status Year ended 30 June

2012 2011 2010 2009

Bring to satisfactory standard ($'000s) 16,539 16,539 15,544 13,214

Required annual maintenance ($'000s) 3,499 2,350 2,433 3,431

Actual annual maintenance ($'000s) 2,524 2,470 2,479 2,075

Total value infrastructure assets ($'000s) 161,456 165,813 167,764 41,722

Total assets ($'000s) 355,458 359,909 360,467 137,110

Infrastructure Backlog Ratio 0.10x 0.10x 0.09x 0.32x

Asset Maintenance Ratio 0.72x 1.05x 1.02x 0.60x

Building and infrastructure asset renewal ratio 0.40x 0.35x 0.64x 1.36x

Capital Expenditure Ratio 0.63x 0.41x 0.85x 1.24x

The Building and Infrastructure Renewals Ratio and Capital Expenditure Ratio indicate that Council

has not been spending the required amounts on asset renewal and maintenance. A continuation of

this level of spending will likely see deterioration in the quality of Council’s assets and an increase in

the Infrastructure Backlog.

The required annual maintenance has been volatile over the review period due to revised estimates of

the value and useful remaining life of the Council’s infrastructure assets.

Walcha Council

3.6(c): Capital Program

Council’s major capital works in 2012 were driven by RMS works. Two major capital works projects in

2012 were;

Topdale Road – Reconstruction and Sealing. Council completed the reconstruction and sealing of

Topdale Road. A special grant of $1.2m from the NSW State Government together with $400,000 from

Council funded the reconstruction and sealing of the remaining 4.3km of this important regional road.

Apsley River – Levee Upgrade and Shared Pathway. Following the completion of extensive flood

studies for the Apsley River, the need to remove low spots along the levee and the reinforcement of the

top of the levee were identified as two high priority projects. A successful grant application realised

$360,000 from State and Federal governments which, together with $180,000 from Council, funded

these projects.

Major Capital Works Projects 2012-2022

Brackendale Road Rehabilitation $0.3m

Evans Street Rehabilitation $0.07m

Glen Morrison Road Upgrades $0.04m

Walcha Council

3.7: Specific Risks to Council

Climate Change. Climate change is considered one of the main risks that the Council is

facing. As the LGA is heavily dependent on agriculture with primary production being sheep,

cattle and forestry. Any changes to environmental factors puts the industry at risk and may

also increase rate arrears.

Ageing Population. At 29% the LGA has a high proportion of aged persons which will likely to

increase over the next 10 years. This will place additional pressure on existing infrastructure

and services and additional services and facilities will be required to meet the needs of an

older population.

Walcha Council

Section 4 Review of Financial Forecasts

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

years. The model includes the $0.6m loan without any LIRS subsidy.

The LIRS loan relates 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 more able to adjust the

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

4.1: Operating Results

The results show that significant deficit positions are expected each year when capital grants and

contributions are excluded as reflected in the Operating Ratio below benchmark for the entire forecast

period. The Ratio decreased in 2012 as a result of increased employee costs and materials and

expenses. The ratio peaks in 2013 driven by a $2.8m decrease in materials and contract expenses.

2012 included additional carry over works and additional costs which were not included in 2013.

The ratio declines again in 2014 as a result of a 13.9% forecast increase in depreciation expense.

From 2014, operating revenue grows at an average rate of 3.0%p.a. while operating expenses grows

at an average rate of 2.2%p.a. and this causes the ratio to rise over the remainder of the forecast

period.

These forecasts indicate Council faces Sustainability issues unless additional revenue sources are

found, services are reviewed, or expenses are reduced.

(35.0%)

(30.0%)

(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

Walcha Council

4.2: Financial Management Indicators

The financial management indicators are linked to the utilisation of debt in early years and diminish

over time as the operating deficits persist.

Liquidity Ratios

The Cash Expense Ratio is below benchmark for the majority of the forecast period. The ratio declines

until 2017 as Council’s IPP&E expenditure is higher than operating cash. The ratio improves

marginally from 2018 as a result of the improving operating position.

0.0 months

0.5 months

1.0 months

1.5 months

2.0 months

2.5 months

3.0 months

3.5 months

4.0 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

Walcha Council

The Unrestricted Current Ratio is forecast to decline over time. With the exception of 2014 the ratio is

below benchmark for the entire forecast period.

Overall, the liquidity ratios are well below the historic levels, and Council will need to review its

operating capacity to be considered sustainable and able to service its current obligations.

3.06x

1.95x

1.37x1.58x

1.01x0.83x 0.73x

0.87x 0.91x 0.83x

1.11x 1.13x

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 9 - Unrestricted Current Ratio for General Fund

Benchmark

Walcha Council

Fiscal Flexibility Ratios

Council forecasts improving Own Source Operating Revenue Ratios because 2011 and 2012 were

impacted by the early receipts of the FAG. The forecast shows the Ratio increasing above benchmark

from 2013 for the remainder of the forecast period as Council has not forecast any capital grants in

their current LTFP for the remainder of the forecast period.

50%

52%

54%

56%

58%

60%

62%

64%

66%

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

Figure 10 - Own Source Operating Revenue Ratio for General Fund

Own Source Operating Revenue Ratio Benchmark

Walcha Council

The DSCR is forecast to be well above benchmark for the entire forecast period. This indicates that

Council has the capacity to manage the additional debt cost that the LIRS application relates to. In

2013 Council plan to draw down $0.7m. $0.6m relates to the LIRS loan and $0.1m is for Council’s

Waste Transfer Station. The decrease in 2014 corresponds with the first year of these loan

repayments.

The Interest Cover Ratio similarly to the DSCR shows that Council has sufficient capacity to service its

scheduled debt commitments including the LIRS loan.

24.17x

16.98x

13.30x

7.31x 7.77x 8.12x 8.21x 8.72x 9.12x 9.49x 9.82x

12.08x

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

30.00x

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

Figure 11 - DSCR for General Fund

Benchmark

58.34x

28.69x

21.84x

9.52x 10.41x 11.16x 11.49x 12.52x 13.42x 14.38x 15.40x 16.88x

0.00x

10.00x

20.00x

30.00x

40.00x

50.00x

60.00x

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

Figure 12 - Interest Cover Ratio for General Fund

Benchmark

Walcha Council

4.3: Capital Expenditure

The Capital Expenditure Ratio is below the benchmark throughout the LTFP. Overall, the total capital

expenditure ($33.8m) is forecast to be $20.4m less than the accumulated depreciation ($54.3m) on a

nominal basis.

The ratio peaks in 2013 as Council has forecast a $1.8m increase in IPP&E purchase due to additional

expenditure for road renewals.

The Unrestricted Current Ratio indicates that Council will face liquidity issues from 2015 and therefore

Council may have difficulty funding the scheduled capital expenditure as indicated in the LTFP. As a

consequence, the quality of Council’s asset base is likely to decline and the value of IPP&E is forecast

to fall from $329.2m in 2012 to $310.9m in 2022.

Council should review their capital expenditure in an effort to maintain their liquidity position.

Council have indicated that the AMP is yet to be incorporated into the LTFP.

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

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

Figure 13 - Capital Expenditure Ratio for General Fund

Capital Expenditure Ratio Benchmark

Walcha Council

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 increase by mid-range LGCI annual increases of 3.0%

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

Rates and annual charges are forecast to increase by 5.2% in 2013. Waste management

charges are forecast to increase in 2013 following a survey completed by Council which

indicated that rural rate payers were underpaying for waste services. From 2014 they are

forecast to increase by 3.3% p.a. which is considered reasonable.

User charges and fees are forecast to decline by 34.6% due to fewer RMS works in 2013 and

Council forecasts average growth of 3.2% p.a. thereafter.

Operating grants and contributions are forecast to decline in 2013, mainly due to lower RMS

contributions and adjustment from the prepayment of the FAG in 2012. Average growth of

3.2% p.a. is forecast thereafter which is considered reasonable.

Employee expenses are forecast to decrease by 9.2% in 2013. 2012 employee expenses

included a one off correction of errors from previous year’s calculations for pro rata accrued

annual leave and long service leave. As these are not included in 2013 a decrease is

forecast. From 2014 Council has forecast employee costs to increase by 3.9% p.a. which is

considered reasonable.

Materials and contracts expenses are forecast to decrease by $2.8m in 2013 as a result of

reduced maintenance and private works. Council also reclassified their renewals expenditure

and moved $1.0m to capital expenditure in 2013. From 2014 these costs are maintained at

approximately $1.4m p.a. as Council has not forecast any major works over period.

The LTFP has been prepared with the assumption that the Roads to Recovery Program will

continue indefinitely. An approach has been undertaken by assuming that the grant will

remain at its current level of $0.4m throughout the LTFP.

Walcha Council

4.5: Borrowing Capacity

When analysing the financial capacity of the Council, based on the current forecast LTFP we believe

Council has a marginal level of borrowing capacity to incorporate additional loan funding in addition to the

$0.6m LIRS loan facilities and $0.1m proposed borrowings for the Waste Transfer Station included in

Council’s financial forecast for the General Fund. However, the forecast shows liquidity issues in the

medium to long term with deficits forecast for the entire period.

Council should review their operating expenses and capital expenditure program to address this issue

prior to committing to any borrowings in addition to those already included in the forecast LTFP.

Walcha Council

4.6 Sustainability

TCorp believes Council is in a weak Sustainability position and based on the current LTFP this position is

likely to deteriorate in the future. This will lead to Council being unsustainable if corrective action is not

taken.

In considering the longer term financial Sustainability of the Council we make the following comments:

Council has reported deficit results for each year of the review period

The LTFP shows operating results at levels substantially below benchmark for the entire

forecast period

Capital expenditure is forecast at levels below what is required to maintain assets at an

acceptable satisfactory standard over the forecast period, and there is no financial capacity to

reduce the existing backlog

Council’s DSCR and Interest Cover Ratio are well above benchmark for the entire forecast

period which reflects Council’s minimal borrowings and their ability to take on the additional

borrowings proposed in the LIRS application

The LTFP has been based on a potential increase in rates as a result of proposed increases in

domestic waste management charges. This may be partially offset by the conservative forecast

in user fees.

Capital expenditure is at the level below what is required to maintain assets at an acceptable

standard over the forecast period

Walcha Council

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 9. There are 21 councils in this group and at the time of preparing this report, we have data

for all of these councils.

In Figure 14 to Figure 23, 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 21 to 23 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. For the Interest Cover Ratio and Debt Service Cover Ratio, we have excluded the highest

Councils because very low debt levels have resulted in very high ratios which are a result of low debt

levels that skew the ratios.

Financial Flexibility

Council’s Operating Ratio was below benchmark for the review period. The ratio decreased in 2011 as a

result of increased depreciation. The ratio is forecast to remain at this level in the medium term.

(40.0%)

(30.0%)

(20.0%)

(10.0%)

0.0%

10.0%

20.0%

30.0%

40.0%

2009 2010 2011 2012 2016

Figure 14 - Operating Ratio Comparison

Benchmark Highest Average Walcha Council

Walcha Council

Council’s Own Source Operating Revenue Ratio was below benchmark but above the group average

over the review period. The proportion of own sourced revenue is forecast to increase above benchmark

in the medium term.

Overall, Council’s financial flexibility is in a weak position.

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

2009 2010 2011 2012 2016

Figure 15 - Own Source Operating Revenue Ratio Comparison


Walcha Council

Liquidity

Council’s Cash Expense Ratio was below the group average but generally tracked benchmark levels

over the review period. The ratio is forecast to maintain this performance in the medium term.

The Unrestricted Current Ratio was above benchmark for the review period and tracked the group

average until 2012. Council did not provide sufficient data to calculate the ratio over the medium term.

Overall, Council’s liquidity position is sound.

0.0 months

5.0 months

10.0 months

15.0 months

20.0 months

25.0 months

30.0 months

2009 2010 2011 2012 2016

Figure 16 - Cash Expense Ratio Comparison


1.00

3.00

5.00

7.00

9.00

11.00

13.00

15.00

2009 2010 2011 2012 2016

Figure 17 - Unrestricted Current Ratio Comparison


Walcha Council

Debt Servicing

Council’s debt servicing capacity was sound over the review period, as indicated by both the DSCR and

Interest Cover Ratio being above benchmark and tracking the group average since 2011. The ratios are

forecast to remain at this level in the medium term.

-

20.00

40.00

60.00

80.00

100.00

120.00

2009 2010 2011 2012 2016

Figure 18 - Debt Service Cover Ratio Comparison


-

20.00

40.00

60.00

80.00

100.00

120.00

2009 2010 2011 2012 2016

Figure 18 - Debt Service Cover Ratio Comparison


Walcha Council

Asset Renewal and Capital Works

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2009 2010 2011 2012 2016

Figure 20 - Capital Expenditure Ratio Comparison


-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2009 2010 2011 2012

Figure 21 - Asset Maintenance Ratio Comparison


Walcha Council

Council’s Infrastructure Backlog Ratio while above benchmark tracked the group average since 2010.

The Asset Maintenance Ratio tracked both benchmark and its peer group over the review period. The

Building and Infrastructure Asset Renewal Ratio and Capital Expenditure Ratio both tracked the group

average and have been below benchmark since 2010.

Council’s Capital Expenditure Ratio is forecast to remain at this level in the medium term.

-

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2009 2010 2011 2012

Figure 22 - Infrastructure Backlog Ratio Comparison

Benchmark Lowest Average Walcha Council

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2009 2010 2011 2012

Figure 23 - Building and Infrastructure Asset Renewal Ratio


Walcha Council

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 a declining financial position.

Despite this we recommend Council receive the LIRS funding for the $0.6m for the Woodbrook Bridge

Replacement as this is an urgently needed bridge improvement critical to the LGA. Although Council’s

financial results are poor it is cash flow positive and can meet the repayments.

We base our recommendation on the following key points:

Council’s DSCR and Interest Cover are above benchmark for the entire forecast period

Council’s Own Source Operating Ratio is above benchmark for the entire forecast period

The LIRS application is addressing a critical infrastructure area which is of vital importance to

the Community

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

Operating results, excluding capital grants and contributions, are forecast to remain well below

benchmark for the entire forecast period. This issue will impact the long term sustainability of

the Council. We recommend Council considers its options for improving its performance in this

area, either by on-going cost controls or securing additional revenue. Given the small rate

base, it is recognised that seeking additional revenue can be difficult.

Council needs to review its medium term liquidity position to ensure that it can meet its

operating expense cashflows.

Walcha Council

Appendix A Historical Financial Information Tables

Table 1- Income Statement

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

2012 2011 2010 2009 2012 2011 2010

Revenue

Rates and annual charges 3,699 3,584 3,439 2,942 3.2% 4.2% 16.9%

User charges and fees 3,402 2,719 2,784 2,603 25.1% (2.3%) 7.0%

Interest and investment revenue 240 241 153 0 (0.4%) 57.5% N/A

Grants and contributions for operating purposes 3,955 2,892 3,101 3,399 36.8% (6.7%) (8.8%)

Other revenues 231 238 174 190 (2.9%) 36.8% (8.4%)

Total revenue 11,527 9,674 9,651 9,134 19.2% 0.2% 5.7%

Expenses

Employees 4,978 4,285 4,192 3,685 16.2% 2.2% 13.8%

Borrowing costs 30 30 11 87 0.0% 172.7% (87.4%)

Materials and contract expenses 4,643 3,438 3,302 3,363 35.0% 4.1% (1.8%)

Depreciation and amortisation 4,286 4,398 2,453 2,103 (2.5%) 79.3% 16.6%

Other expenses 887 970 852 950 (8.6%) 13.8% (10.3%)

Total expenses 14,824 13,121 10,810 10,188 13.0% 21.4% 6.1%

Operating result (excluding capital grants and contributions) (3,297) (3,447) (1,159) (1,054) 4.4% (197.4%) (10.0%)

Operating result (including capital grants and contributions) (2,448) (1,386) (315) (364) (76.6%) (340.0%) 13.5%

Table 2 - Items excluded from Income Statement

Excluded items 2012 2011 2010 2009

Grants and contributions for capital purposes 849 2,061 844 690

Interest revenue/ (losses) (380)

Net gain from the disposal of assets 172 (279) 172 276

Walcha Council

Table 3 - Balance Sheet

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

2012 2011 2010 2009 2012 2011 2010

Current assets

Cash and cash equivalents 3,528 3,606 1,850 1,457 (2.2%) 94.9% 27.0%

Investments 337 728 730 1,208 (53.7%) (0.3%) (39.6%)

Receivables 1,574 1,027 1,406 843 53.3% (27.0%) 66.8%

Inventories 678 1,274 1,381 1,731 (46.8%) (7.7%) (20.2%)

Other 0 0 15 0 N/A (100.0%) N/A

Total current assets 6,117 6,635 5,382 5,239 (7.8%) 23.3% 2.7%

Non-current assets

Investments 20 0 0 0 N/A N/A N/A

Receivables 20 41 34 33 (51.2%) 20.6% 3.0%

Infrastructure, property, plant & equipment 349,301 353,233 355,051 131,838 (1.1%) (0.5%) 169.3%

Total non-current assets 349,341 353,274 355,085 131,871 (1.1%) (0.5%) 169.3%

Total assets 355,458 359,909 360,467 137,110 (1.2%) (0.2%) 162.9%

Current liabilities

Payables 524 647 196 391 (19.0%) 230.1% (49.9%)

Borrowings 4 39 47 44 (89.7%) (17.0%) 6.8%

Provisions 1,502 1,222 1,431 1,273 22.9% (14.6%) 12.4%

Total current liabilities 2,030 1,908 1,674 1,708 6.4% 14.0% (2.0%)

Non-current liabilities

Borrowings 7 12 50 98 (41.7%) (76.0%) (49.0%)

Provisions 1,157 673 913 640 71.9% (26.3%) 42.7%

Total non-current liabilities 1,164 685 963 738 69.9% (28.9%) 30.5%

Total liabilities 3,194 2,593 2,637 2,446 23.2% (1.7%) 7.8%

Net assets 352,264 357,316 357,830 134,664 (1.4%) (0.1%) 165.7%

Walcha Council

Table 4-Cashflow

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

2012 2011 2010 2009

Cash flows from operating activities 1,506 3,895 1,883 2,287

Cash flows from investing activities (1,544) (2,093) (1,445) (2,091)

Proceeds from borrowings and advances 0 0 0 0

Repayment of borrowings and advances (40) (46) (45) (41)

Cash flows from financing activities (40) (46) (45) (41)

Net increase/(decrease) in cash and equivalents (78) 1,756 393 155

Cash and equivalents 3,528 3,606 1,850 1,457

Walcha Council

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.

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

Walcha Council

EBITDA

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 infrastructure, building, other structures

and depreciable land improvements 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.

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)

Walcha Council

Integrated Planning and Reporting (IP&R) Framework

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.

Walcha Council

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)*12

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

expenses without additional cash inflow.

Capital Expenditure Ratio


http://www.lanecove.nsw.gov.au/Council%20Services/Development%20Control/Development%20Controls/Contributions%20Plans/documents/SECTION94PLANinclamendmentsof160204.pdf

http://www.lanecove.nsw.gov.au/Council%20Services/Development%20Control/Development%20Controls/Contributions%20Plans/documents/SECTION94PLANinclamendmentsof160204.pdf

Walcha Council

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

Building and Infrastructure Backlog Ratio

Benchmark = Less than 0.02x

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

infrastructure, building, other structures and depreciable land improvement assets (from note 9a)

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)

Walcha Council

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.

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