Port Macquarie-Hastings Financial Sustainability Review€¦ · financial sustainability, including...

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UTS CRICOS PROVIDER CODE 00099F

University of Technology Sydney Institute for Public Policy and Governance

Centre for Local Government

Port Macquarie-Hastings Financial Sustainability

Review

Financial Sustainability Review – Port Macquarie-Hastings Council

Executive Summary Financial sustainability of local government is a concern for regulatory authorities across the developed world, including in New South Wales (NSW). As a result, considerable efforts have been made within the NSW local government sector in recent years to attempt to measure and monitor financial sustainability. In the process, Port Macquarie-Hastings Council has received mixed assessments from such government-led programmes. In particular:

• NSW Treasury Corporation deemed Port Macquarie-Hastings Council to possess weak financial sustainability, with a negative outlook.

• NSW Office of Local Government deemed Port Macquarie-Hastings Council to possess a moderate infrastructure management assessment.

• NSW Independent Pricing and Regulatory Tribunal deemed Port Macquarie-Hastings Council to satisfy the sustainability criterion, did not satisfy the infrastructure and service management criterion, and satisfied the efficiency criterion.

The University of Technology Sydney: Institute for Public Policy and Governance (UTS: IPPG) was engaged by Port Macquarie-Hastings Council to conduct a review of its financial sustainability, including an operational efficiency analysis. This review was informed by the expertise of UTS academics who are world leading authorities in this field. In this review enclosed, we offer a more detailed and reliable analysis of financial sustainability than that conducted within reports conducted over recent years by various government authorities.

In this analysis conducted by UTS:IPPG we performed the following activities that improve upon earlier efforts made to measure and monitor financial sustainability. In particular, we:

• Employ an extended number of indicators to those employed in earlier efforts, which include a number of measures of particular importance to local government financial sustainability

• Examine performance against a relevant peer group (rather than emphasising performance solely against particular, arbitrary benchmarks)

• Examine measures over a five-year period (as opposed to just three years that IPART did or the current year only as OLG does)

• Precisely specify, measure and analyse operational efficiency, to provide a superior indication of operational performance compared to earlier efforts

In particular, our financial sustainability review here enclosed examines the following:

• Demographic opportunities and risks (fifteen measures employed, though for brevity we focus here only on those of material importance to PMHC) – see Section 2, also Appendix E


• Operating performance measures (seven measures employed) – see Section 3, also Appendix A-D

• Operational efficiency analysis (using an empirical modelling technique known as Data Envelopment Analysis (DEA) (described in Section 4.2)) – see Section 4

• Financial management measures (fifteen measures employed), including a brief cash flow analysis and a brief examination of relative depreciation rates across the major asset classes – see Section 5, also Appendix A

We provide detailed tables of the data that we collected in Appendices A-E, as well as summaries of relative performance rankings amongst the peer group for the years under examination in Sections 3.2 and 5.6.

Generally speaking, our review finds that overall financial sustainability of Port Macquarie-Hastings Council is strong and particularly impressive given the operating environment of Council. Notwithstanding this, we note that there are a number of potential areas in which ongoing improvement may benefit financial sustainability going forward, which we discuss further in Section 6.1. We also note that, amongst the range of measures under examination, Port Macquarie-Hastings Council has tended to perform particularly well in those measures for which we believe are the most appropriate indicators for which Council’s performance should be assessed. For this reason, while we find that Port Macquarie-Hastings Council has underperformed in a range of additional measures, including compared to the peer group, this tends to occur in areas that we feel should be of relatively lower priority – and with generally lesser implication for financial sustainability – for Council.

In particular our findings indicate the following achievements made by Port Macquarie-Hastings Council:

• Performance in overall operating activity has generally been at a very high and consistent level of relative technical efficiency compared to other NSW water and sewer-serving councils – though the 2015-16 year witnessed a reduction in relative technical efficiency.

o This is generally a strong indicator of financial sustainability as relatively efficient councils are less likely to be dependent on high levels of revenue inflows or reliance on debt

• Significant progress has been made to improve the operating performance ratio compared to recent years and compared to the peer group – though it would appear that Council is projecting a negative forward outlook

o This is generally a strong indicator of financial sustainability because it implies that citizens fully meet the cost of services provided by Council and operating expenditures are contained within operating revenues

• Substantial efforts have been made in containing increases to non-road operating expenditures per rateable property, for which Port Macquarie-Hastings outperformed the peer group for 2015-16.


o In common with efficiency, cost-effectiveness is a strong indicator of financial sustainability as it indicates that controllable factors in general operational activity are managed with limited wastage. This can also be a reflection of an effective organisational culture that promotes cost-effective practices, which is a predictor of future operating expenditure.

• Significant progress has been made in alleviating the nett financial liabilities position in recent years

o Maintaining a nett current asset position is a strong indicator of financial sustainability as it indicates a relatively low level of dependence on short-term debt

• Effective management of cash has been exercised and a high degree of cash liquidity has been demonstrated

o Positive and strong operating cash-flow performance indicates, inter alia, that positive operating results are not simply the manifestation of accrual distortions. In turn, this supports the conclusions above regarding financial sustainability

o Cash liquidity supports financial sustainability by ensuring that immediate expenses are able to adequately paid for when they fall due

• Staff expenditures per rateable property has been constrained reasonably well in recent years – notwithstanding a surge in 2013-14 and a slight uptick in 2015-16

o Staff expenditures are an important controllable variable that requires tight constraints to be applied in order to prevent deterioration to operating results, and challenges to reduce staff levels in future, if required.

The areas in which we identify potential improvements which would benefit general financial sustainability include the following:

• Cost-effectiveness of operational activities for road, water and sewer supplies has generally deteriorated since 2011-12, including compared to the peer group, notwithstanding an improvement in 2014-15

o For road and water operational expenditures, consultation with Port Macquarie-Hastings Council indicated that expenditures may be subject to an upwards trajectory for the medium term. As a result, strategic planning to identify more cost-effective methods, in concert with evaluation of the quality of service delivery, could be a matter for consideration.

• Budget inaccuracy has at times been excessive, which augments financial decision-making and planning

o For the most part, significant variations to revenue have been associated with extraneous factors to operational activities, or factors that could not be reasonably accounted for. In part, such revenue variations indirectly


have impacted upon expenditure variations as a result. Nonetheless, it will remain appropriate to exercise control over budgets going forward.

• Financial flexibility, while performing generally at around the average level compared to the peer group, will require sustained improvements given the local context, particularly demographic forces

o It would be appropriate, in particular, to strengthen the nexus between the services demanded and those paying for services. This may require steady expansion of the revenue base, including an increase in the proportion of user fees and charges. This could mean that difficult, even unpopular, decisions may become necessary to support financial sustainability and ease the burden on current and future ratepayers. Some possible items for consideration in this regard are included in Section 6.1.4.

• Asset management indicators remain an area of underperformance, with only modest improvements being achieved over time, to date, especially compared to substantial improvements generally being made across the peer group over the same period

• It may be appropriate to review current depreciation rates, which appear potentially to be artificially high compared to peers, which may be placing undue downward pressure on other related financial indicators

o Specifically, we identify:

▪ Possible over-depreciation of assets within the following classes: roads, bridges, footpaths, stormwater, water, sewer. Together these assets make up around 82 per cent of the portfolio of depreciable assets

▪ Possible under-depreciation of assets within the following classes: plant and equipment, depreciable land improvements, buildings. Together these assets make up around 12 per cent of the portfolio of depreciable assets

▪ We stress, however, only that these depreciation schedules may require further examination to ensure that allocations accurately reflect consumption. Our findings are based on observations made across the peer group, not conclusions about Council’s actual asset consumption.

o As a result, Port Macquarie-Hastings Council may wish to evaluate its current valuation of assets and depreciation methodologies, with a view to maintaining an appropriate degree of accuracy and consistency against the practices of comparable councils.

Finally, we warn that demographic developments will continue to work against Port Macquarie-Hastings Council’s prospects for financial sustainability, unless strategic efforts are made to made in response to this. In particular, demographic forces appear likely to contribute to increased expenditure and reduced revenue over time, which will


require future reductions in expenditure, an increase in revenues or a combination of both, in order to prevent deterioration to financial sustainability.

For this reason, we encourage the consideration of the following measures:

• Care should be taken if considering borrowings in view of the fact that its repayment capacity is likely to reduce over time

• Care should also be taken when considering the introduction of new services or service upgrades to ensure that they are fully funded, not just in the present, but also into the future (in cognisance of increased demands and reduced revenue capacity)

• Be particularly alert to potential cost-shifting, especially with respect to pensioner concessions for local services

• There is a particular need to strengthen the nexus between the services demanded and those paying for the service

• It may be necessary to consider variable pricing for merit goods to better reflect the circumstances of resident-consumers

In general, Port Macquarie-Hastings Council has taken important steps in recent years to improve its financial sustainability. We believe that focussing on the aforementioned areas of potential improvement will help it to continue to strengthen its financial sustainability in the years to come. There is no quick fix to financial sustainability and the best course is continued prudent management. Moreover, in all areas of performance there are trade-offs to be made. We think that PMHC has largely managed these trade-offs as well as might be expected for a council operating in its particular environment and with the legacy inherited from previous administrations.


Table of Contents 1. Introduction 10

1.1 Measuring financial sustainability 11

1.2 Comparable financial sustainability performance information 12

1.3 A guide to interpreting charts used in this report 13

2. Demographic profile: opportunities and risks 15

2.1 Population and development growth 15

2.2 Demographic breakdown of population 16

2.3 Addressing demographic risk to improve financial sustainability 18

3. Operating Financial Ratios 19

3.1 General operating performance 19

3.1.1 Operating Ratio 19 3.1.2 Non-road Opex per Assessment 21 3.1.3 Employee Expenditure 22 3.2 Operating performance by services 24

3.2.1 Roads and bridges operating expenditure 24 3.2.2 Water supply operating expenditure 25 3.2.3 Sewer supply operating expenditure 27 3.2 Summary of operating financial performance 27

4. Operational Efficiency 30

4.1 Explaining efficiency 30

4.2 Efficiency modelling 32

4.3 Efficiency results 33

4.3.1 Relative efficiency to entire NSW population 33 4.3.2 Relative efficiency to NSW water and sewer servicing councils 34 4.4 Summary of relative technical efficiency 36

5. Financial management ratios 38

5.1 Budget accuracy 39

5.1.1 Revenue accuracy 39 5.1.2 Expenditure accuracy 40 5.2 Revenue and service levels 41

5.2.1 Own Source Ratio 41 5.2.2 Nexus ratio 42 5.3 Liquidity and cash flow 43

5.3.1 Cash Flow Analysis 44 5.3.2 Unrestricted Current Ratio 45 5.3.3 Cash Expense Ratio 46 5.4 Debt and debt recovery 47


5.4.1 Debt levels 47 5.4.2 Debt servicing 48 5.4.3 Debt recovery 49 5.5 Asset management 51

5.4.1 Infrastructure Backlog 51 5.4.2 Asset Maintenance 52 5.4.3 Building and Infrastructure Renewal 53 5.4.4 Capital expenditure 54 5.4.5 Depreciation Rate 55 5.6 Summary of financial management relative performance measures 59

6. Concluding Remarks 61

6.1 Possible Actions to Improve Financial Sustainability 61

6.1.1 Budget Accuracy 61 6.1.2 Staff Expenditure 61 6.1.3 Outstanding Rates and Annual Charges 62 6.1.4 Fees and Charges 62 6.1.5 Advocacy 64 6.1.6 Debt 64 6.1.7 Depreciation 64 6.2 Final comments 65

References 66

Appendices 68

Appendix A: Detailed tables: financial ratios, consolidated funds 68

Appendix B: Detailed tables: financial ratios, disaggregated – general fund 74

Appendix C: Detailed tables: financial ratios, disaggregated – water fund 77

Appendix D: Detailed tables: financial ratios, disaggregated – sewer fund 80

Appendix E: Demographic measures 83

Figures Figure 1. Growth in Population and Assessments 15 Figure 2. Descriptive Characteristics of Population (2015-16) 16 Figure 3. Welfare Recipients as Proportion of Population, 2015-16. 17 Figure 4. Aged Pension Recipients Over Time (2011-2016). 17 Figure 5. Operating Ratio 20 Figure 6. Non-road Opex per Assessment 22 Figure 7. Staff expenditure/Total OPEX (%) 23 Figure 8. Staff expenditure per assessment 23 Figure 9. Road Opex per Kilometre 25 Figure 10. Water Opex per Connexion 26 Figure 11. Sewer Opex per Connexion 27


Figure 12. Efficiency of Port Macquarie-Hastings Council Relative to All New South Wales Councils, 2011-2016 33 Figure 13. Efficiency of Port Macquarie-Hastings Council Relative to All New South Wales Councils, 2011-2016 34 Figure 14. Efficiency of Port Macquarie-Hastings Council Relative Only to Councils Providing Water or Sewer Services 35 Figure 15. Relative Technical Efficiency of Port Macquarie-Hastings and Selected Peers (Only Water and Sewer Providers), 2011-2016 35 Figure 16. Variation to Budgeted Revenue 39 Figure 17. Variation to Budgeted Expenditure 40 Figure 18. Own Source Ratio 42 Figure 19. Nexus Ratio 43 Figure 20. Cash Flows 44 Figure 21. Unrestricted Current Ratio 45 Figure 22. Cash Expense Ratio (months) 46 Figure 23. Cash Expense Ratio (weeks) 46 Figure 24. Nett Financial Liabilities Ratio 48 Figure 25. Debt Service Cover Ratio 49 Figure 26. Rates and Annual Charges Outstanding 50 Figure 27. Infrastructure Backlog Ratio 52 Figure 28. Asset Maintenance Ratio 53 Figure 29. Buildings and Infrastructure Renewal Ratio 54 Figure 30. Capital expenditure ratio 55 Figure 31. Depreciation Rate 56 Figure 32. Potentially Under-estimated Depreciation Items 57 Figure 33. Potentially Over-estimated Depreciation Items 58

Tables Table 1. Comparable peer group used in this report. 13 Table 2. Summary of relative performance in operating financial ratios. 29 Table 3. Relative technical efficiency Scores, all NSW councils 34 Table 4. Relative technical efficiency scores, councils supplying water and sewer services 36 Table 5. Input Reductions Required to Achieve Frontier, Water and Sewer Councils DEA ($’000) 36 Table 6. Summary of relative performance across financial management measures 60

Financial Sustainability Review – Port Macquarie-Hastings Council 10

1. Introduction

Financial sustainability of local government is a concern for regulatory authorities across the developed world, including in New South Wales (see, for instance, Drew and Grant, 2017). Achieving financial sustainability is particularly important at the local level of government, given that it is closest to the general public and shoulders substantial service provision burdens (Bolívar et al, 2016). A number of government-led efforts in recent years have attempted to implement performance monitoring and reforms to improve financial sustainability of NSW councils, as well as the sector as a whole.

It is our view, generally, that these efforts have largely been misguided as a result of poorly specified performance measures – and especially the employment of arbitrary benchmarks and consolidation of measurement instruments – which may lead to misleading conclusions regarding financial sustainability.

For instance, in New South Wales Treasury Corporation’s (T Corp) 2013 financial sustainability analysis, a single index measure was employed that arbitrarily consolidated ten ratios (operating ratio, cash expense ratio, unrestricted current ratio, own-source ratio, debt service cover ratio, interest cover ratio, infrastructure backlog ratio, building and infrastructure renewal ratio, asset maintenance ratio, capital expenditure ratio), which were subject to equally arbitrary benchmarks, into a single rating for sustainability (and outlook).

In addition, IPART (2015), in its assessment process for Fit for the Future, consolidated three indicators to determine ‘sustainability’ (operating performance ratio, own-source ratio, building and asset renewal ratio), a further three indicators to determine ‘effective infrastructure and service management’ (infrastructure backlog ratio, asset maintenance ratio, debt service ratio), and, finally, efficiency was measured according to operating expenditure per capita (a deficiency which we discuss in more detail in Section 4).

Thereafter, the NSW Office of Local Government (OLG, formerly Division of Local Government (DLG)) has continued to pursue a ‘Local Government Performance Measurement Framework’ with monitoring of performance of, inter alia, financial sustainability (in terms of arbitrary benchmarks for operating performance, cash expense ratio, own-source ratio, unrestricted current ratio, debt service ratio, debt service cover ratio, rates and annual charges outstanding ratio – albeit with some minor accounting for geographical differences in the setting of relevant benchmarks) and asset management (building and infrastructure renewal ratio, infrastructure backlog ratio, asset maintenance ratio).

In this report, we provide a more detailed and reliable analysis of financial sustainability than that conducted within reports conducted by the OLG and others (such as IPART and T Corp) in recent years. This is because we:

• Employ an extended number of indicators, which include a number of measures of particular importance to local government financial sustainability

• Examine performance against a relevant peer group (rather than emphasising performance solely against particular, arbitrary benchmarks)


• Examine measures over a five-year period (as opposed to just three years that IPART did or the current year only as OLG does)

In particular, our financial sustainability review here enclosed examines the following:

• Demographic opportunities and risks (fifteen measures employed, though we focus here only on those of material importance to PMHC) – see Section 2

• Operating performance measures (seven measures employed) – see Section 3

• Operational efficiency analysis (using an empirical modelling technique known as Data Envelopment Analysis (DEA) (see Section 4.2)) – see Section 4

• Financial management measures (fifteen measures employed), including a brief cash flow analysis and a brief examination of relative depreciation rates across the major asset classes – see Section 5

In this review, we do not provide analyses of other components of financial sustainability that are beyond this scope, such as debt capacity and the like, though we do make some passing references to an earlier report conducted for PMHC relating to its adequacy of financial reserves.

1.1 Measuring financial sustainability

Within the academic community, financial sustainability within local government remains something of an elusive concept. This is because the range, scope, and relative importance of particular potential influencers to sustainability often vary significantly. In any case, ‘sustainability’ nevertheless requires the application of a subjective judgment.

Moreover, financial sustainability is a continuous concept (that is, it is typically forward focused and not specifically time bound) for which we generally are required to employ point-in-time indicators (namely, the end of financial year) in order to inform this particular judgment. Given that sustainability is assessed on a continuous basis, though, this makes it important to examine trends over time and attempt to extrapolate these to future points in time when making determinations (though we refrain from conducting projections and forecasts of the same).

Generally speaking, the continuous nature of financial sustainability means that the best benchmark for performance for any council may often be itself, over time (though it is worth noting that with the Fit for the Future process, temporal comparisons can be complicated, given that this process resulted in significant behavioural changes across the local government sector of NSW). This is because the council’s set of possible outcomes can be heavily dependent on the constraints and opportunities that are present in the environmental context that each council finds itself operating in. For this reason, definitive comparisons between the performance of one council for a given measure with that of another should be treated with caution.

Nonetheless, employing a suitably representative peer group offers the opportunity to provide a ‘feeling’ for what kind of performance might be feasible, since comparable peers likely face similar constraints and opportunities as the council under examination, generally speaking: It is our view that provision of comparable peer performance markers


is far superior to the setting of universal numerical benchmarks for each financial ratio in apparent ignorance of the huge body of scholarly evidence warning against just such a practice (see for instance, Drew and Dollery, 2016). For this reason, our analysis examines the temporal performance of PMHC as well as its relative performance compared to the peer group (see Section 1.2 for details of the peer group employed).

It is also important for users of this report to note that most indicators are not orthogonal in design – that is, the indicators are related either directly or indirectly, and attempts to improve in one indicator will almost certainly have implications for at least one other indicator (Drew and Dollery, 2015a). That is, trade-offs can clearly exist between pursuits to achieve particular measures, and as a result, we argue against the pursuit of arbitrary benchmark achievement for any single indicator (see also, for instance, Carmeli 2002, Bevan and Hood, 2006; DeBruijn and van Helden, 2006; Drew and Grant, 2017). Instead, we suggest that a wide range of measures be considered in concert.

1.2 Comparable financial sustainability performance information

In order to ensure comparable performance information to inform our review, we have employed a peer group of councils. This is constituted of a representative comparable group to PMHC, made up of the entire cohort of DLG 5 councils as well as nine peers from the DLG 4 group, as listed in Table 1. We note that this peer group is consistent with the groupings employed in an earlier report prepared by UTS:IPPG on behalf of PMHC. This comparison group applies to all analysis of financial and demographic indicators (Sections 2, 3 and 5), however in Section 4’s operating efficiency analysis we examine the population of all NSW councils, and the subset that is comprised of water and sewer providing councils.

In general, comparisons to the peer group serve as an important benchmarking method, particularly where peers have similar operating conditions and deliver services of a comparable quality. Our choice of peer group is primarily determined by grouping comparable council on the basis of operating conditions, as it is not possible to group on the basis of the quality of service delivery, as no suitable measure is available to be employed for this purpose at the present time. It would be appropriate, if data availability was present, to account for differences in performance indicators based upon constructed measures which were quality-adjusted. In lieu of this, we assume that over time quality of service delivery should tend to be broadly comparable amongst similar councils, though at particular points in time quality variations may certainly exist, which we are unable to account for.


Table 1. Comparable peer group used in this report.

DLG 5 Councils Selected DLG 4 Councils

Coffs Harbour Albury

Lake Macquarie Ballina

Maitland Byron

Newcastle Dubbo

Port Macquarie-Hastings Lismore

Shoalhaven Port Stephens

Tweed Shire Shellharbour

Wollongong Tamworth

Wagga Wagga

For most indicators we collected and examined five years of data (2011-12 to 2015-16) with an additional sixth year (2010-11) employed in our efficiency analysis (Section 4). In collecting data, we consulted the following:

• Annual financial statements for PMHC, the peer group, and the remaining NSW councils

• Australian Bureau of Statistics (ABS) demographic data, sorted by local government area

• Department of Social Services (DSS) service recipient data, sorted by local government area

• Local government comparative performance data, provided by OLG

• Local Government Cost Index, from IPART

• Road length data, made available by NSW Local Government Grants Commission

• PMHC’s public documents (Resourcing Strategy, Long Term Financial Plan)

• Successive NSW local government reports, including those of OLG, IPART, and T Corp

1.3 A guide to interpreting charts used in this report

We use box and whisker plots (now commonly referred to as Boxplots) throughout this report in order graphically represent data. This is because boxplots are the most efficient and effective way of presenting comparative data. Boxplots display measures of central tendency (i.e. the 'middle' or 'typical' value) and measures of spread (how closely councils cluster about the 'typical' value) at a single glance. To construct a boxplot one first arranges all data in ascending order.


The median is the middle score when data is arranged in this manner (ascending order). As such, it is a measure of the typical value. The median is generally considered to be a better measure of central tendency than the mean (or average) as it is resistant to skewing by outliers. Quartiles are the middle score found by separating the sorted data set along the median (quartile 1 is the 25th percentile and quartile 3 is the 75th percentile). On the boxplot these two quartiles are used to construct the horizontal boundaries of the 'box'. Moreover, the distance from Q1 to Q3 represents the Inter Quartile Range (IQR) which is a measure of spread (a measure which is superior to its alternative - the standard deviation - as it is not subject to skewing).

The whiskers extend 1.5 IQR out from the box and mark the range of high variance from the 'typical' result. On occasions it is necessary to plot extreme outliers and these are represented by a dot. Finally, the box and whisker plot also records the mean (or average) with a 'x'. As we have noted it is not a good measure of central tendency, however by examining the discordance between the median and mean one can quickly gain an appreciation of the degree of skewing (another indication of this is how far off centre the median line is within the box).

In order to further assist in interpretation, we provide an example below:


2. Demographic profile: opportunities and risks

The influence of demographic trends has long been underestimated in the examination of general financial sustainability (see, for instance, Bolívar et al 2016). Yet, it is arguably one of the most important factors for predicting need and capacity to raise revenue to address need. In this Section we highlight two important factors with respect to examination of PMHC’s general financial sustainability:

• The growth in population and development (Section 2.1)

• The growth and size of the over 65 age group (Section 2.2)

Following this, in Section 2.3 we offer some observations and suggestions to address these challenges and to support PMHC’s financial sustainability going forward.

2.1 Population and development growth

Our recent report prepared for PMHC examined challenges related to being in a high growth area – specifically with respect to provision of infrastructure to respond to growth patterns and raising sufficient funds for same (see our earlier report on reserves adequacy). In addition, we also indicated that development growth resulted in relatively high capital expenditure.

Figure 1. Growth in Population and Assessments

Figure 1 indicates that population growth in PMHC has exceeded the growth in the peer group in each year under examination. Indeed, the average annual growth in population

-1.0%

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0.5%

1.0%

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2011-12 2012-13 2013-14 2014-15 2015-16

PMHC Pop Growth Peer Group Pop Growth

PMHC Residential Growth Peer Group Residential Growth

PMHC Business Growth Peer Group Business Group


over the period was 1.21 per cent compared to the peer group average of 1.01 per cent (20 per cent faster).

In addition, PMHC’s residential assessment growth generally exceeds that of its peers (on average 0.98 per cent average annual growth compared to 0.94 per cent) although growth in business assessments lags behind that of the peer group (with an average annual growth of just 0.03 per cent compared to 0.43 per cent).

2.2 Demographic breakdown of population

As part of our analysis, we examined the distribution of key demographic indicators in PMHC and the peer group. Figures 2, 3, 4 identify the primary demographic risk factor facing PMHC – that of a particularly high proportion of people over the age of 65.

This is relevant because this cohort tends to have lower average household size and can be expected to have lower average household expenditure (especially with respect to families). As a result, large proportions of the population over the age of 65 poses challenges for \financial sustainability in local government. In particular, there is a large body of empirical work that demonstrates that this cohort has a higher demand for council services and, with this, increases per capita local government expenditure (see, for instance Drew et al. 2014). At the same time – if this cohort is in receipt of the aged pension – they also represent reduced revenue capacity.

The other particularly acute demographic challenge facing PMHC is the low density within the local government area. Low density generally means higher costs to deliver services such as roads, water and sewer. While nominally demographic factors of this sort are taken into account in financial assistance grant allocations, there are a number of empirical studies that demonstrate that the horizontal fiscal equalisation (HFE) principles of the Local Government Financial Assistance Grant Act 1995 (CTH) are routinely disregarded by state local government grant commissions (and exacerbated by certain provisions in the act which work against achievement of the desirable HFE objective).

Figure 2. Descriptive Characteristics of Population (2015-16)

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Density <15 Pop >65 Pop ATSI NESB

PMHC Peer Group


To test PMHC’s revenue capacity we compiled data for welfare receipts in PMHC and across the peer group.

Figure 3. Welfare Recipients as Proportion of Population, 2015-16.

Figure 3 indicates that PMHC is disadvantaged in terms of revenue capacity by its particularly high proportion of aged pension recipients (over 20 per cent of the population, compared to around 13 per cent across the peer group – over 50 per cent higher rate).

Figure 4. Aged Pension Recipients Over Time (2011-2016).

Figure 4 further demonstrates that not only does PMHC have a larger proportion of the population in receipt of the aged pension but that the growth in this population is also higher in PMHC than the peer group. That is, between 2011-12 and 2015-16 the average annual growth in the aged person proportion of the population was 1.63 per cent in

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Aged Pension DSP Newstart Single Parent

PMHC Peer Group

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PMHC Aged (%) Peer Group Aged (%)


PMHC compared to 0.88 per cent across the peer group – nearly twice as fast. It would appear likely that this population group will continue to grow.

2.3 Addressing demographic risk to improve financial sustainability

Of course, the discussion in Section 2.2 will come as no surprise to Councillors and Council Executives and unfortunately there is little that can be done to arrest the trend. However, it does mean that PMHC must act strategically –and in a manner different to many of its peers – to protect long-term financial sustainability. A number of implications and considerations of the above include:

• PMHC will need to take particular care if considering borrowings in view of the fact that its repayment capacity is likely to reduce over time.

• Care should also be taken when considering the introduction of new services or service upgrades to ensure that they are fully funded, not just in the present, but also into the future (in cognisance of increased demands and reduced revenue capacity).

• PMHC must also be particularly alert to potential cost-shifting – obviously there is the existing pensioner discounts to contend with (and Council should be ready to advocate if increases to these discounts are countenanced by State government), but the experience of austerity in other nations has shown that higher tiers of government will also look to potentially off-load welfare related responsibilities on local government as a way to arresting their own budget woes. This typically takes the form of offering to partner with local government on a full compensation basis in the provision of a particular service, but then tapering off compensation over time in order to shift the cost onto local government.

• The demographic challenge facing PMHC also underscores the need to strengthen the nexus between the services demanded and those paying for the service (we discuss this more in Section 5.2.2).

o In particular it is critical to ensure private goods and services are priced according to supply side or demand side principles, that the level of subsidium is reviewed regularly to ensure its appropriateness, and that the true cost of local government goods and services are communicated effectively (Drew and Grant, 2017).

• PMHC might also consider introducing variable pricing for merit goods to better reflect the circumstances of resident-consumers and thus take some pressure off revenue foregone (see, Grant and Drew, 2017).

• The increased expenditure and reduced revenue associated with pensioners needs to be balanced by a reduction in expenditure, an increase in other revenues or a combination of both for the level of financial sustainability to remain unchanged. This may be a consideration when deliberating on whether to pursue future special rate variations (SRV).


3. Operating Financial Ratios

In this Section, we review a range of financial ratios relating to general operating performance as well as specific areas of importance to operating service provision – namely, roads, water and sewer supply services. This Section is intended to be viewed in concert with the remainder of the report, and especially with Section 4’s operational efficiency analysis. We note that in Section 4’s model we do not split operational efficiency into particular service provision, which is something that we drill into in Section 3.2 here instead.

3.1 General operating performance

In order to provide analysis for general operating performance we employ the following indicators:

• Operating performance ratio

• Non-road operating expenditure per assessment

• Employee expenditure share of total expenditure

• Employee expenditure per assessment

General operating performance is then further examined in Section 4 within the context of our measurement of overall council ‘efficiency’ (which we define in Section 4.1).

3.1.1 Operating Ratio

Councils’ overall operating performance is often summarised in the headline financial performance measure – operating surplus and deficit – expressed in a ratio form (below). Within NSW, the OLG encourages councils to pursue ‘surplus results’, while ‘taking into account the condition and maintenance of assets in the process’ (OLG, 2015, p. 12). This is because the OLG takes the view that the operating performance ratio provides an indicator of a council’s achievement in containing operating expenditure within operating income (OLG, 2015).

A number of benchmarks for this measure have been in place over recent years, including T Corp’s >-4% and OLG’s >0%, though it is our view that each council’s operating ratio is most appropriately set based on its own underlying local conditions. This ratio is measured as follows:

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 (𝑒𝑥𝑐𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑔𝑟𝑎𝑛𝑡𝑠 𝑎𝑛𝑑 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠)

− 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 (𝑒𝑥𝑐𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑔𝑟𝑎𝑛𝑡𝑠 𝑎𝑛𝑑 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠)

It is important to note that the operating performance ratio excludes grants made for capital purposes. As a result, it is our view that this can in some cases create an unduly negative perception of performance – for instance, because negative performance may still be associated with a positive cash flow (see Section 5.).


Nonetheless, the operating performance ratio remains an important comparative metric within NSW local government, particularly because a positive operating ratio implies that citizens fully meet the cost of services provided by Council. In turn, to enable general financial sustainability ensuring that expenses, on average, do not exceed revenues, is an important contributing factor.

Figure 5. Operating Ratio

It is clear from Figure 5 that PMHC has lifted performance in the operating performance ratio considerably in the two most recent financial years (2014-15 and 2015-16). This is consistent with the uplift in median performance for the peer group over the same period. With this improvement in recent years, PMHC now meets the benchmark set in Fit for the Future for this indicator, and indeed exceeds it by some margin. In 2015-16, PMHC recorded the 4th highest operating performance ratio amongst the peer group (behind Albury, Tamworth, and Tweed). PMHC has improved progressively against the peer group, generally improving its ranking within the group over time (5th ranked in 2014-15, 11th ranked in 2013-14, 8th in 2012-13, 11th in 2011-12).

This is a strong endorsement of PMHC’s efforts in recent years and the ‘number of improvement initiatives to improve this ratio’ noted in the 2017-2021 Resourcing Strategy. It would appear from PMHC’s Long Term Financial Plan, however, that there is an expectation of a deterioration to the operating performance ratio projected for the much of the forward year period, excluding under the Special Rate Variation scenario.

Based upon expectations of PMHC’s likely medium-term outlook, it is possible that PMHC may outperform the projections for the operating ratio as set out in the Long Term Financial Plan and remain broadly in line with the current position. Nonetheless, it is important to recognise that consistently high operating ratios can be cause for disgruntled local government taxpayers and give rise to unintended outcomes (see Grant and Drew, 2017), particularly when combined with substantial infrastructure backlogs. This could be a factor that may require management of community expectations given our suggestion in Section 2.3 that it may be appropriate for PMHC to accumulate financial resources at the present time to address the implications of a generally adverse demographic outlook into the future.

PMHC = 7.44

PMHC = 3.71

PMHC = -6.88

PMHC =-3.70

PMHC =-7.04


In any case, a number of pressures have the potential to impact upon operating performance into the medium-term:

• The already discussed demographic implications for revenue capacity and demand for services

• A negative shock to the local property market could result in downgraded revenues associated with developer contributions and future ratepayer base

• The expected deployment of PMHC’s financial reserves for infrastructure provision – as scheduled into the medium term – has the potential to reduce investment and interest income, as well as contributing to an increased depreciation burden as additional infrastructure delivery reaches completion

3.1.2 Non-road Opex per Assessment

Operating expenditures are a critical controllable feature of operational efficiency. In NSW local government, operating expenditure is made up of the following components:

• employee expenditures (employee benefits and on-costs),

• borrowing costs,

• materials and contracts,

• depreciation and amortisation,

• net losses from asset disposal,

• and assorted other expenses.

In order to enable comparability of operating expenditure between peers, we exclude the expenses relating to road service provision (given the high degree of variability in this particular area, which we examine instead in Section 3.2.1), and water and sewer expenditures (which are examined in Sections 3.2.2 and 3.2.3 respectively), and then standardise expenditures by dividing this by the number of rateable properties.

In turn, our non-road opex per assessment ratio is computed as follows:

𝑇𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑓𝑟𝑜𝑚 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 − 𝑟𝑜𝑎𝑑 𝑎𝑛𝑑 𝑏𝑟𝑖𝑑𝑔𝑒𝑠 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒−𝑤𝑎𝑡𝑒𝑟 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 − 𝑠𝑒𝑤𝑒𝑟 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑟𝑎𝑡𝑒𝑎𝑏𝑙𝑒 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑖𝑒𝑠


Figure 6. Non-road Opex per Assessment

Figure 6 indicates that compared to the peer group, PMHC has consistently performed well in this indicator. In particular, in 2015-16 PMHC recorded the lowest non-road operating expenditure ratio amongst the peer group. In addition, this performance has been consistent, ranking close to the best in the group in each of the years under examination: 3rd in 2014-15, 2nd in 2013-14, 3rd in 2012-13, 3rd in 2011-12.

Moreover, compared to itself over time, PMHC’s non-road operating expenditure ratio has hardly deviated, suggesting strong control measures have been put in place to manage operational expenditure despite operating in an environment of increasing costs (for instance, increases to wages and material costs over this period). Compared to the average growth in median non-road opex per assessment since 2013-14 across the peer group (3.92 per cent), PMHC has managed to restrain its the average growth rate to just 1.24 per cent.

3.1.3 Employee Expenditure

Employee expenditure is an important area for councils to focus on given that it typically accounts for around one third of total operating expenditure. We are also aware that PMHC has had a particular focus on this area of expenditure for some time and that ‘council has worked hard to contain staffing with very little movement in full time equivalent employees in the last few years (507 in 2015-16 compared to 490 in 2013-14) despite regional growth and improved service’ (PMHC, 2017, p. 24).

There are two main ways of comparing staff expenditure over time. The first way deflates staff expenditure by total operating expenditure, as below:

𝑇𝑜𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑎𝑛𝑑 𝑜𝑛𝑐𝑜𝑠𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

PMHC =2.08

PMHC =2.01

PMHC =2.03

PMHC =1.99

PMHC =2.05


Figure 7. Staff expenditure/Total OPEX (%)

Figure 7 indicates that PMHC’s staff expenditure share of total operating expenditure as a proportion of operating expenditure has generally been managed quite well and has performed better than the median throughout the period examined. In 2015-16, PMHC recorded the 4th lowest staff expenditure share of total operating expenditure across the peer group, which is broadly consistent with its ranking amongst the group (7th in 2014-15, 5th in 2013-14, 4th in 2012-13, 4th in 2011-12).

The second measure of relative staff expenditure accounts for the size of council:

𝑇𝑜𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑎𝑛𝑑 𝑜𝑛𝑐𝑜𝑠𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑟𝑎𝑡𝑒𝑎𝑏𝑙𝑒 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑖𝑒𝑠

Figure 8. Staff expenditure per assessment

PMHC =31.25%

PMHC=28.98%

PMHC =27.17%

PMHC =28.02%

PMHC=29.84%

PMHC =1.22

PMHC =1.21

PMHC =1.08

PMHC =1.07

PMHC=1.26


Figure 8 demonstrates that since 2011-12, PMHC has increased its staff expenditure per assessment each year – this is not particularly unusual, however, given that staff expenditures tend to naturally increase over time. This is mostly attributable to the 12.2 per cent increase in PMHC’s ratio in 2013-14 (above the 3.0 per cent increase in the median of the peer group in the same year). Indeed, over the period of 2011-12 to 2015-16, PMHC’s average annual growth rate in staff expenditures per assessment has been 4.3 per cent compared to 3.2 per cent for the median of the peer group over the same period.

In 2015-16 PMHC recorded the 7th lowest ratio and remains below the typical cost within the peer group (with a ratio of 1.31), however it has lost ground with respect to the peer group, dropping from the 3rd lowest ranking in 2011-12.

This suggests that there has been a moderate deterioration in the staff expenditure given PMHC’s size (in terms of number of rateable properties). It will be necessary to continue to exercise restraint in growth in staffing expenditure going forward to ensure long-term financial sustainability. Consultation with PMHC has indicated a moderate expected increase in staffing in coming years. This would appear to be broadly reasonable given that there is also growth in the ratepaying base, increase in properties and the population demanding services. In any case, however, it will be necessary to temper growth in employee expenditures in line with expected growth in rateable properties to avoid further deterioration in this performance measure.

3.2 Operating performance by services

While Section 3.1 examined general operating performance of PMHC, in Section 3.2 here we examine three specific areas of operational performance that are important to Council’s service delivery and financial sustainability. In particular, in this subsection we examine the areas of:

• Roads and bridges operating expenditure

• Water supply operating expenditure

• Sewer supply operating expenditure

3.2.1 Roads and bridges operating expenditure

Expenditure on road maintenance typically accounts for a major service activity of local governments in Australia. We compute the following ratio as a performance measure for the relative cost-effectiveness of road service provision:

𝑇𝑜𝑡𝑎𝑙 𝑟𝑜𝑎𝑑𝑠 𝑎𝑛𝑑 𝑏𝑟𝑖𝑑𝑔𝑒𝑠 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

𝑇𝑜𝑡𝑎𝑙 𝑙𝑒𝑛𝑔𝑡ℎ 𝑜𝑓 𝑟𝑜𝑎𝑑𝑠x100


Figure 9. Road Opex per Kilometre

Figure 9 shows that PMHC has performed at around the median level across the peer group – operating at a lower road operating expenditure per kilometre than the median in all years other than 2011-12. In 2015-16, PMHC recorded the 7th lowest ratio amongst the peer group, which is nonetheless an improvement on its placing (11th) in 2011-12. We note that one important driver of road operating expenditure is PMHC’s relatively high depreciation rate for road assets (see Section 5.4) as well as relatively low population density.

Given the large share of expenditure dedicated to road maintenance this is an important cost item to remain control over. Consultation with PMHC indicated that decision-makers are cognisant of the necessity to balance needs for service delivery and managing road expenditures. Initiatives that utilise technology to report quality and usage of roads to Council can be a useful tool to assist in service planning and managing quality levels – both identifying needs for service upgrades, and reducing the frequency of early upgrades of non-deficient quality. This technology can serve as a substitute for anecdote, professional estimation, and reactiveness to community complaints.

3.2.2 Water supply operating expenditure

Water supply remains an important item of local government service delivery. We employ the following ratio as a performance measure of cost-effectiveness of water supply services:

𝑇𝑜𝑡𝑎𝑙 𝑤𝑎𝑡𝑒𝑟 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑠 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑎𝑡𝑒𝑟 𝑐𝑜𝑛𝑛𝑒𝑥𝑖𝑜𝑛𝑠

PMHC =19.63

PMHC =17.53

PMHC =18.74

PMHC =17.67

PMHC =19.59


Figure 10. Water Opex per Connexion

Figure 10 indicates that PMHC has generally underperformed compared to the peer group in the water opex per connexion ratio. In particular, PMHC’s expenditure per connexion has been above the median for the peer group for three out of the five years under examination. Moreover, in 2015-16 water operating expenditures per connexion increased by 21 per cent, despite the median ratio falling slightly. As a result, PMHC recorded the highest water operating expenditure per connexion amongst the peer group for 2015-16.

It will be important for PMHC to determine whether this spike in expenditure is temporary or permanent and ensure that permanently higher unit costs do not emerge. In part, water expenditures can be subject to lesser scrutiny and direct supervision than other operational activity of similar quantum, which can make steady increases less visible to management. The general increases in expenditures since 2011-12 may be associated with a correction from artificially low levels of, in particular, staffing during this earlier period. In addition, more proactive renewal efforts including a recurring works programme over this period, are contributors to the increase from 2011-12 levels. Another contributing factor may be associated with the depreciation schedules for water assets, as we find that PMHC’s depreciation rate is considerably above the median for the peer group (3.91 per cent compared to 2.31 per cent, see Section 5.4).

Consultation with PMHC identified a high contribution of energy costs in driving the observed increase in water expenditures. This has been associated with the disproportionately high degree of water pumping activity to lift water within PMHC’s network. As a result, it may be appropriate to consider options which may contribute to future reductions in the unit cost of water service delivery into the medium and long term. For instance, adjustments to the network could be made with the view to make better use of topography. In addition, the quality of water treatment services above and beyond the community’s willingness to pay might reasonably be reduced in an effort to control expenditures in this area. Finally, the nature of current and prospective development could reduce unit costs of service if new connexions are relatively cheap to service compared to the current connexions within the network – particularly if there is relatively higher density within the development profile, say from subdivision and the like.

PMHC =0.87

PMHC =0.72

PMHC =0.80

PMHC =0.76

PMHC =0.62


3.2.3 Sewer supply operating expenditure

Like water supply, sewer supply services continue to be an important component of local government service delivery. We employ the following ratio as a performance measure of cost-effectiveness in sewer supply services:

𝑇𝑜𝑡𝑎𝑙 𝑠𝑒𝑤𝑒𝑟 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑠 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑒𝑤𝑒𝑟 𝑐𝑜𝑛𝑛𝑒𝑥𝑖𝑜𝑛𝑠

Figure 11. Sewer Opex per Connexion

Figure 11 indicates that PMHC has recorded sewer opex per connexion costs below the median for the peer group for three out of the five years under consideration (and only barely above the median for the peer group in the 2015-16 financial year). This is a particularly strong result given that depreciation rates for PMHC sewer assets (3.05 per cent) are considerably above the median rate for peers (2.29 per cent) (see Section 5.4). Consultation with PMHC indicated that sewer expenditures may be expected to remain broadly consistent with the current level for the time being.

3.2 Summary of operating financial performance

In Sections 3.1 and 3.2 we have examined areas of general operating performance as well as specific service provision. In general, our analysis has found that PMHC’s operating performance is broadly strong compared to the peer group despite some worsening in several measures (road, water and sewer operating expenditures as well as a modest increase in staff expenditures per assessment) in 2015-16. Particularly strong performance has been recorded in PMHC’s non-road operating expenditure per assessment, and related to this, the operating performance ratio (which includes all operating activity).

PMHC =0.87

PMHC =0.80

PMHC =0.95

PMHC =0.85

PMHC =0.62


In turn, the analysis presented in this Section indicates a generally positive indication for PMHC’s general financial sustainability. In Table 2 we summarise PMHC’s relative performance across these measures presented in this Section over time.


Table 2. Summary of relative performance in operating financial ratios.

2011-

12 2012-

13 2013-

14 2014-

15 2015-

16 Comments

Operating Performance

Ratio 11th 8th 11th 5th 4th

Better than average

achievement, with

significant progress made in

recent years

Non-road Opex per Assessment

3rd 3rd 2nd 3rd 1st Excellent

achievement

Employee Expenditure/Total

Opex 4th 4th 5th 7th 4th

Better than average

achievement

Employee Expenditure per

Assessment 3rd 4th 8th 8th 7th

Average achievement

, with worsening

outcomes in recent years

Road Opex per Kilometre

11th 7th 7th 5th 7th Average

achievement

Water Opex per Connexion*

3rd 7th 7th 4th 9th

Low level of achievement

in current year - some variability in outcomes over time

Sewer Opex per Connexion**

3rd 5th 7th 4th 6th

Below average

achievement, with

worsening outcomes in current year

*Peer group is made up of 9 councils rather than the typical 16 **Peer group is made up of 10 councils rather than the typical 16


4. Operational Efficiency

Efficiency is a concept which has taken on great importance for regulatory authorities and councils, especially since the Fit for the Future reforms. Indeed, the architects of the recent reform – the Independent Local Government Review Panel (ILGRP, 2012) – made reference to the concept over thirty times in its very first publication. Specifically, it was asserted that efficiency was able to be ‘ploughed back …into infrastructure, services and other benefits for their communities’ (p. 32), ‘achieve the long term goal of financial sustainability’ (p. 34), ‘keep rate increases to affordable levels’ (p. 42), and ‘provide value for money to their ratepayers and external agencies’ (p. 76) (ILGRP, 2013). Despite this, however, the term has not been precisely defined by those seeking to employ it.

Nonetheless, efficiency represents an important feature of general financial sustainability. Inefficient governments require relatively greater in-flows of revenue or relatively higher levels of debt and this may carry implications for financial sustainability. For this reason, we dedicate this Section to a sophisticated analysis of PMHC’s operational efficiency relative to the cohort of NSW local governments for the period 2010-11 to 2015-16.

4.1 Explaining efficiency

As we indicated above, there are some definitional matters associated with the use of the ‘efficiency’ term. In particular, this is because there are three types of efficiency discussed in the economic literature with reference to local government goods and services:

• Allocative efficiency: refers to the ability to match demand for specific services with supply and is resolved as part of the political process (Andrews and Entwistle, 2013).

• Dynamic efficiency: refers to improvement in the conversion of inputs into outputs over time as a result of better technology, training and diffusion of best practice (Grant and Drew, 2017).

• Technical efficiency: relates to the optimal conversion of inputs into outputs (Feiock et al. 2006).

It is this latter type of efficiency which regulatory authorities and reform architects seem to be referring to when prosecuting the case to enhance efficiency – sometimes rather vaguely in terms of cost-effectiveness or economy.

There are at least three good reasons for desiring optimal levels of technical efficiency:

• High levels of technical efficiency reflect effective stewardship of taxes paid by landowners.


o This is because taxpayers expect all tiers of government to spend funds prudently on public goods, merit goods and goods exhibiting positive externalities1.

• High levels of efficiency are an important ingredient of financial sustainability (Drew et al. 2015a)

o Inefficient governments require relatively greater in-flows of revenue or relatively higher levels of debt and this may have implications for sustainability. Thus, inefficient local governments may resolve as higher taxation and fees or as a threat to intergenerational equity.

• Efficiency can act as a helpful guide to those charged with deliberating on the introduction of new services, outsourcing of services and improvement of services or infrastructure.

Yet efficiency has not been measured accurately within NSW local government outside of the scholarly literature (nor in any other jurisdiction of local government in Australia). During Fit for the Future efficiency was measured in terms of real operating expenditure per capita (see, for example, Drew and Dollery 2015a), and disaggregated measures of operational expenditure per capita persist in the Office of Local Government Time Series Data (2017). However, expressing efficiency as operational expenditure per capita is a flawed practice, likely to give rise to some seriously misleading conclusions. A number of reasons for this include:

• Employing just a single input (operational expenditure) fails to accurately reflect the production process employed in local government.

o There are, in fact, two major inputs (staff and capital) and it is important not to conflate these.

• Population is a very poor proxy for local government output.

o In particular, this is because it is negatively correlated with road length (that is, lower population local governments tend to have the longest road networks and roads are the single largest item of local government expenditure) which means that ‘efficiency’ measures produced this way will be empirically biased against small councils (Drew and Dollery, 2015a).

o Using population as a proxy also implausibly suggests that:

▪ Business does not consume local government services

1 Provision of these services is the raison d’etre for local government: Public goods are those which are non-excludable and non-rival in consumption and therefore unlikely to be provided by private business (example street lighting); merit goods are those which have ‘virtue’ for residents but would not be consumed at adequate levels in the absence of subsidies (example library facilities); goods exhibiting positive externalities are those that have benefits for individuals other than those directly consuming them (example rubbish collection) – see Grant and Drew 2017 for a detailed explication.


▪ The cost of providing services (such as rubbish collection) is precisely linearly associated with the number of people living in a property

▪ The cost of servicing farms (which generally receive relatively less services and lower standards of local government goods) is the same as the cost of servicing residential properties.

It is therefore clear that extant measures are worse than useless – they contribute to misleading conclusions and poor decision making. In Section 4.2 we offer an alternative method and measure to perform efficiency analysis and then present PMHC’s results in Section 4.3.

4.2 Efficiency modelling

In order to overcome the shortcomings in common measures of efficiency that are regularly employed to the local government context, in this subsection we will introduce an alternative empirical technique that we employ here. Our preferred method is known as data envelopment analysis (DEA) and it enables us to consider all inputs and all relevant output proxies simultaneously in analyses of efficiency. In addition, DEA is a non-parametric technique which can produce point estimates of efficiency for each decision-making unit (in our case, this refers to councils) relative to the efficient frontier (comprised of councils that demonstrate the most optimal conversion of inputs into outputs; see, Drew et al. 2015b or Cooper et al. 2007 for a more detailed description of the linear programming which forms the foundation of DEA).

Each council for each year of analysis is assigned a simple to interpret relative technical efficiency score ranging from 0 (perfectly inefficient relative to peers) through to 1 (lying on the efficient frontier – that is, perfectly efficient relative to peers). Thus, the distance from 1 represents the relative level of inefficiency for a given council in a particular year with respect to the maximal performance in the observed population.

We employ an input orientation for our DEAs, consistent with the corpus of scholarly literature (see, Drew et al. 2015a, 2015b, 2015c). An input orientation measures the possible reduction of inputs with output taken to be fixed (Coelli et al. 2005) and accords with the fact that councils have relatively little control over output proxies (local governments can’t significantly reduce the number of properties or length of roads). The specification for the DEA is also consistent with Australian scholarly literature (see, for example, Drew et al. 2015b):

Inputs = operational expenditure + staff expenditure

Outputs = number of residential assessments + number of business assessments + number of farming assessments + length of sealed roads + length of unsealed roads.

Nonetheless, we note that whilst DEA can accommodate significantly more inputs and outputs than ratio analysis and the like, there are constraints (such as Nunamker’s rule) which mean that we still need to employ proxies which are most reflective of local government outputs, rather than listing each and every output provided by councils.


4.3 Efficiency results

In order to provide a full account of PMHC’s relative technical efficiency we compared PMHC’s performance to the efficient frontier made up of two populations, as well as to the constituent DLG 4 and DLG 5 councils:

• The entire cohort of NSW councils (Section 4.3.1)

• The subset of this population made up of all water and sewer servicing councils in NSW (Section 4.3.2)

We employed the model specification as outlined in Section 4.2. This analysis was performed for the period 2010-11 to 2015-16. All pecuniary data was inflated to 2016 terms to allow for accurate intertemporal comparisons.

4.3.1 Relative efficiency to entire NSW population

We first conducted DEA for all NSW local governments to provide the broadest relative peer group (in similar vein to how Fit for the Future compared all councils without distinction), notwithstanding the fact that this empirical estimate is likely to be biased against councils such as PMHC that provide water and sewer services.

Figure 12. Efficiency of Port Macquarie-Hastings Council Relative to All New South Wales Councils, 2011-2016

Figure 12 presents the efficiency scores of PMHC over this period with reference to the entire NSW local government population. This shows that relative technical efficiency peaked for PMHC in 2012-13 – with a relative efficiency score of 0.73 – where inefficiency relative to the efficient frontier was reduced to 27.1 per cent. In 2015-16 PMHC’s technical efficiency relative to the NSW cohort had reduced, recording technical inefficiency of 35.8 per cent (relative technical efficiency of 0.64). This suggests that PMHC is operating 35.8 per cent less efficient than the most efficient council in NSW.

In order to disaggregate this, we next compared the relative technical efficiency of the DLG 4 and DLG 5 councils.

0.6

0.62

0.64

0.66

0.68

0.7

0.72

0.74

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16


Figure 13. Efficiency of Port Macquarie-Hastings Council Relative to All New South Wales Councils, 2011-2016

Figure 13 shows that Tamworth has regularly operated at close to the efficient frontier over the time period and that Albury has operated relatively far from the efficient frontier. PMHC has regularly performed below the average relative technical efficiency across the DLG 5 group and since 2013-14 has operated below the average relative technical efficiency across the DLG 4 group. This account of relative technical efficiency is further detailed in Table 3 where we see PMHC efficiency appears to have declined in a context where the average comparable peer group has generally slightly improved.

Table 3. Relative technical efficiency Scores, all NSW councils

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

Five Year Average

Port Macquarie-Hastings

0.722 0.718 0.729 0.667 0.672 0.642 0.692

DLG 4 Average 0.688 0.686 0.682 0.689 0.701 0.702 0.691

DLG 5 Average 0.769 0.762 0.776 0.777 0.767 0.746 0.766

However, we note that comparing the performance of PMHC to the entire state may not represent the most comparable units to measure against. This is because a state-wide analysis makes comparisons between councils with very different profiles. A much fairer and more reliable comparison is to examine efficiency relative to other NSW councils which also provide water and sewer services.

4.3.2 Relative efficiency to NSW water and sewer servicing councils

When a DEA is executed that only considers councils which also produce water and sewer services a very different picture of PMHC relative technical efficiency emerges. We replicate Figures 12 and 13 here with PMHC’s relative technical efficiency to all other NSW water and sewer servicing councils.

0.4

0.5

0.6

0.7

0.8

0.9

1

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16DLG 4 Average DLG 5 AveragePort Macquarie-Hastings TamworthAlbury


Figure 14. Efficiency of Port Macquarie-Hastings Council Relative Only to Councils Providing Water or Sewer Services

As Figure 14 shows, PMHC actually lies on the efficient frontier for two of the six years under consideration (2014-15 and 2012-13). In 2015-16, however, PMHC is operating with 9.8 per cent inefficiency relative to the most efficient water and sewer servicing council in NSW (relative technical efficiency of 0.9).

Figure 15. Relative Technical Efficiency of Port Macquarie-Hastings and Selected Peers (Only Water and Sewer Providers), 2011-2016

In Figure 15 we compare the relative technical efficiency of PMHC to comparable peers in DLG 4 and DLG 5 which also supply water and sewer. This shows that PMHC has generally performed above the DLG 5 and DLG 4 peer group averages. We also show that Tamworth continues to be the relevant high performing comparison peer but that

0.88

0.9

0.92

0.94

0.96

0.98

1

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

0.6

0.7

0.7

0.8

0.8

0.9

0.9

1.0

1.0

1.1

2011 2012 2013 2014 2015 2016DLG 4 Average DLG 5 AveragePort Macquarie-Hastings TamworthLismore


Lismore now occupies the low performance benchmark when we consider just DLG 5 and DLG 4 councils that supply water and sewer services.

Notably, while PMHC has generally operated close to the efficiency of Tamworth in most years, in both 2013-14 and 2015-16 comparative performance slipped somewhat. It will be necessary to ensure that relative technical efficiency does not persist on a negative trend.

We further clarify these results in Table 4 by providing the precise point estimates for each year.

Table 4. Relative technical efficiency scores, councils supplying water and sewer services

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

Five Year Average

Port Macquarie-Hastings

0.991 0.984 1.000 0.919 1.000 0.902 0.966

DLG 4 Average 0.883 0.891 0.869 0.883 0.911 0.926 0.894

DLG 5 Average 0.908 0.911 0.926 0.911 0.909 0.870 0.906

It is also possible to determine the proportionate movement required for PMHC to be projected onto the efficient frontier for the years where efficiency was less than one (although end-users must remain cognisant of the fact that these are relative efficiency scores). In Table 5 we provide details of the reduction in inputs that might have been required to achieve optimal efficiency.

Table 5. Input Reductions Required to Achieve Frontier, Water and Sewer Councils DEA ($’000)

Year Reduction required

(Opex) Reduction Required

(Staff)

2010-11 511.476 354.060 2011-12 896.619 624.423 2013-14 4,962.724 3,454.507 2015-16 6,065.488 4,347.199

Of particular note is the required reduction in staff inputs. Given the fact that it is no easy matter to reduce staff inputs, this would seem to suggest that PMHC should exercise caution when considering increasing full time equivalent (FTE) staff numbers.

4.4 Summary of relative technical efficiency

Our efficiency analysis demonstrates two very important things:

• The importance of using appropriate techniques and output proxies. Moreover, it is not reasonable to compare councils from across the entire state when examining efficiency and doing so will lead to misleading conclusions and poor quality public policy interventions.


• Our DEA shows that PMHC generally performs at a very high level of relative technical efficiency.

o Though the 2015-16 year indicates a significant reduction in relative technical efficiency.

Ratepayers in PMHC should take comfort from this analysis that their taxes are being spent prudently and that the relatively high standards of stewardship are being met. As a result, any potential challenges facing PMHC’s financial sustainability do not stem from the standard of technical efficiency.


5. Financial management ratios

While Sections 3 and 4 have been primarily focused on the operational results for PMHC compared to the peer group, particularly in terms of efficiency (Section 4) and cost-effectiveness (most of Section 3), in this Section we evaluate the overall financial performance through concise consideration of a wide range of financial management measures, made up of common NSW local government metrics as well as additional measures employed by UTS:IPPG.

The measures and analyses conducted here are organised as follows:

• Budget accuracy

o Budget variation to actual revenues/expenditures

• Revenue and service level

o Own-source ratio

o Nexus ratio

• Liquidity and cash flow

o Cash flow analysis

o Unrestricted current ratio

o Cash expense ratio

• Debt and debt recovery

o Debt service cover ratio

o Nett financial liabilities ratio

o Rates and annual charges outstanding ratio

• Asset management

o Infrastructure backlog ratio

o Asset maintenance ratio

o Building and infrastructure asset ratio

o Capital expenditure ratio

o Depreciation rate analysis


In Section 5.5 we provide a summary of PMHC’s relative performance in each of these measures as well as a detailed table of performance results across measures can be found in Appendix 2. We remind readers here, as we did in Section 1, that general conclusions should not be made from assessments made in any single performance measure, but should be judged as a whole, and with consideration of particular context.

5.1 Budget accuracy

It is important for budgets to be as accurate as possible in order that decision-makers can make informed decisions. Unfortunately, it is sometimes difficult for those charged with preparing budget projections to do so accurately – there are many external factors which impact on budget accuracy that are neither predictable nor controllable. However, it is important to regularly assess budget accuracy in order to inform the preparation of future budgets and decision making in general. In any case, not all budget variations are per se a bad outcome for Council – ie unexpected revenue for instance is a good result – however inaccuracies compared to budgets can be an indicator of poor financial controls, planning, and foresight. This can contribute to poor decision-making when the information provided to management is subject to regular variation or is inaccurate.

To this end we provide metrics for revenue and expenditure budget accuracy:

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑡𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒−𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒x100

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑡𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒−𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒x100

5.1.1 Revenue accuracy

Figure 16. Variation to Budgeted Revenue

PMHC =39.53

PMHC =-4.90

PMHC =23.49

PMHC =18.38

PMHC =7.44


Figure 16 indicates that PMHC has regularly under-estimated revenues. For instance, in 2015-16 the deviation from budget was 39.53 per cent, which far exceeded the peer group – for whom the typical underestimate was in the order of 17.95 per cent (mean) or 11.66 per cent (median). This resulted in PMHC recording the 3rd poorest revenue accuracy across the peer group for 2015-16. This is partly related to PMHC’s recovery of investment losses – contributing around a 12.2 per cent of revenue that was unbudgeted. Over the entire time period under examination, however, PMHC has not always performed poorly. In 2014-15 and 2011-12 PMHC performed relatively well – slightly overestimating and underestimating respectively.

Nonetheless, it is certainly true that the influence of revenue flows related to grants which may be challenging to predict at the time of budget preparation. It is also important to note that a positive result for this metric carries far less potential harm for prudent decision-making than does a negative result. A brief examination of the most recent financial statement suggests that capital grants were the area most underestimated (which is also the area of greatest uncertainty), followed by operating grants, interest and investment revenue and then user charges and fees.

5.1.2 Expenditure accuracy

Figure 17. Variation to Budgeted Expenditure

Figure 17 indicates that PMHC has generally performed better in expenditure accuracy than revenue accuracy, compared to the peer group. Nonetheless, in 2015-16 was the 9th most accurate in its expenditure accuracy. On average across the period examined, PMHC has overestimated expenditure in the order of 1.2 per cent, however this is largely influenced by the outlying result of 2014-15 where expenditures were overestimated by over 10 per cent.

In any case, a positive result for this measure is considered more harmful to the decision-making processes than a negative result. Nonetheless, when PMHC does under-estimate expenditure it is generally relatively small in magnitude – in the order of two to three percent. If the precise causes for these under-estimates cannot be identified then

PMHC =3.05

PMHC =-10.26

PMHC =2.66

PMHC =-2.94

PMHC =1.61


it may be prudent to adjust budgeted expenditures up by a few per cent in order to enhance the contribution to prudent decision making.

A brief examination of the most recent financial statements suggests that borrowing costs were the expense most under-estimated. While this item is usually quite predictable, borrowing costs have varied as a result of PMHC’s loan refinancing activity. While this is expected to return savings over the life of the loan in question, break costs nonetheless have been incurred upfront which were not budgeted for. Similarly, in order to recover investment losses in 2015-16 unbudgeted costs were incurred in doing so. Finally, nett loss from disposal of assets also included relatively high variation to budget. Loss on disposal of assets can be exacerbated by under-estimating depreciation accruals – which we examine in Section 5.5.5.

5.2 Revenue and service levels

Revenue measures and service levels are particularly important in consideration of general financial sustainability in the context of local government. This is because, long term, it is generally more feasible to constrain expenditures in efforts to arrest declines in financial sustainability, however revenue and service level measures may require early intervention to reverse any potential deterioration observed in outcomes before they inhibit general financial sustainability. These measures are also likely to be interrelated with other financial and demographic measures of interest.

The two ratios that we employ here to assess this measure are as follows:

• Own-source ratio

• Nexus ratio

5.2.1 Own Source Ratio

This ratio measures the proportion of revenue generated by Council with respect to total revenue. The difference between this indicator and unity essentially represents the level of grants received. The OLG considers this ratio to be an important indicator of ‘financial flexibility’ in the event that higher levels of own-source revenue suggest lesser reliance on external funding – say in the form of operating and capital grants and contributions. The ratio is computed as follows:

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑡𝑜𝑡𝑎𝑙 𝑔𝑟𝑎𝑛𝑡𝑠 𝑎𝑛𝑑 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

We note that it is generally a much easier task for councils which provide water and sewer services for their communities to perform well in this indicator. We also note that the own source ratio was one of the more problematic indicators employed by TCorp and Fit for the Future since it serves as a disincentive for councils to pursue grant funds, and fundamentally misconceives the role of horizontal fiscal equalisation grant transfers in a federation2 (see, Grant and Drew, 2017; Drew and Dollery, 2015a).

2 Section 6(3) of the Local Government (Financial Assistance) Act 1995 clearly states that funds should be distributed according to the principle of horizontal fiscal equalisation (HFE) – which means that more funds should go to councils that have greater expenditure demands and/or lower revenue capacity, so that all local governments can provide a basic level of services.


For councils in high growth areas it is anticipated that high levels of horizontal fiscal equalisation grants are made available, if grants are allocated in an empirically defensible manner (which they are not necessarily at present).

Figure 18. Own Source Ratio

Figure 18 indicates that PMHC has consistently achieved the somewhat arbitrary benchmark set in Fit for the Future for this indicator – over 60 per cent – averaging 69.2 over the five-year period. Compared to its peers, PMHC has ranked relatively high – 4th in 2015-16 – with the worst performance, relative to the peer group, in 2014-15 (ranked 8th). The Long Term Financial Plan indicates that PMHC anticipates to remain above the benchmark into the medium term, and indeed, under scenarios this measure is projected to increase going forward.

In any case, and given that the level of grants and the rate of local government taxation is largely outside of Council’s direct influence in any event, we encourage PMHC to focus attention on the Nexus ratio for general financial sustainability purposes.

5.2.2 Nexus ratio

This indicator measures the proportion of operational expenditure (opex) funded by annual charges, user charges and fees. There is no benchmark for this indicator (it was not part of Fit for the Future), nor is a benchmark appropriate: What we are interested in here is maximising the proportion of opex funded by fees over time and with respect to the environmental constraints faced by Council. We take the view that increasing the proportion of opex funded by fees will have two benefits for financial sustainability: it can not only increase revenue, but also it can dampen demand for services (see, Grant and Drew, 2017).

Councils such as PMHC which are located in high growth areas (which have concomitant high expenditure demand), might reasonably expect higher levels of grants, which would make it difficult for them to achieve universal benchmarks for the own source ratio. Otherwise stated relatively poor performance in this ratio is simply an indication that a council is receiving the level of grants commensurate with a HFE system of intergovernmental grants – it is in no way a reflection of risk or standard of stewardship practiced by council.

PMHC =63.50

PMHC =74.82

PMHC =68.66

PMHC =66.83

PMHC =72.11


In previous work for PMHC we have empirically demonstrated a statistically significant negative association between nexus and operating expenditures. Moreover, in addition to improving financial sustainability, strengthening the nexus between opex and fee revenue improves equity for all local government taxpayers. Economic theory has long argued that the common tax pool must be reserved for public goods, the subsidium component of merit goods and the contribution required to ensure that goods with positive externalities are being consumed at economically efficient levels (Grant and Drew, 2017). When goods other than these are funded from the common tax pool inequity amongst taxpayers emerges because some residents and businesses end up consuming what amounts to private benefits, but only pay a tiny fraction of the cost (with most of the cost being borne by their fellow local government taxpayers). We provide further detail on how Council can strengthen this nexus (and hence improve financial sustainability) in Section 6.

𝑇𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐ℎ𝑎𝑟𝑔𝑒𝑠 + 𝑇𝑜𝑡𝑎𝑙 𝑢𝑠𝑒𝑟 𝑐ℎ𝑎𝑟𝑔𝑒𝑠 𝑎𝑛𝑑 𝑓𝑒𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

Figure 19. Nexus Ratio

Figure 19 indicates that PMHC has generally operated above the median and mean level for this measure. Over the period under examination, the average nexus ratio for PMHC was 48.8 per cent, compared to the peer group average of 43.4 per cent. Only in 2015-16 was PMHC below the median performance in this measure, ranking in 8th across the peer group. We believe that key to ensuring financial sustainability will be continuing to make improvements to this measure. That said, there is a need for nexus to be achieved higher for PMHC than for peers as a result of demographic implications for other aspects of the revenue base (as discussed in Section 2).

5.3 Liquidity and cash flow

It is our view that far too little attention is paid to the cash flow of councils in NSW when examining performance. For this reason, we briefly provide an analysis of cash flows in Section 5.3.1. In addition, we examine liquidity in Sections 5.3.2 and 5.3.3 using the

PMHC =51.31

PMHC =51.73

PMHC =48.57

PMHC =46.82

PMHC =45.34


unrestricted current ratio and cash expense ratio – both of which are commonly employed in NSW. Both of these ratios measure liquidity as at a specific point in time (30 June). Whilst liquidity is rarely an issue of overriding significance within NSW local government, it should be noted that NSW has witnessed a severe liquidity crisis in the past (in fact Australia’s first case of local government financial failure) – Central Darling Shire (see, Drew and Campbell, 2016).

5.3.1 Cash Flow Analysis

We have calculated the cash flow position for PMHC and its peer group over the five years under examination. To allow for valid comparisons we have deflated cash flows by revenue, which is consistent with examples in the scholarly literature (see, for example, Steccolini et al. 2017). Positive operating cash flows are critical to the long-term sustainability of a council and provide an alternative to the Operating Ratio, which may be subject to distortion as a result of unexpected movements in depreciation accruals.

Figure 20. Cash Flows

PMHC’s operating cash flows are strongly positive and have, for the most part, been increasing over the period of analysis. This bodes well for Council’s long-term sustainability and is a good sign that improvements in the operating ratio are not being driven by depreciation distortions (see, also, Section 5.5).

Negative cash flows in investing activities are an important sign that a council is paying due attention to the need to purchase assets to meet future community needs. This is particularly important for councils operating in high-growth areas. In most instances PMHC is outspending the typical council in its peer group, which is both appropriate and a sign of good stewardship.

Finally, financing cash flows tell us whether councils are borrowing heavily to fund investing activities (particularly). Financing cash flows at PMHC have averaged -1.27 per cent over the period of analysis which suggests that Council is paying back borrowings faster than its typical peer. Once again this is a positive indication.

-60

-40

-20

0

20

40

60

2011-12 2012-13 2013-14 2014-15 2015-16Operating Cash Flow Operating Cash Flow Median

Investing Cash Flow Investing Cash Flow Median

Finance Cash Flow Finance Cash Flow Median


However, we stress that cash flows – like all metrics – only tell part of the story so it is important to interpret these results with respect to the other metrics.

5.3.2 Unrestricted Current Ratio

The unrestricted current ratio is used to measure the adequacy of working capital and the ability to satisfy short-term obligations as they fall due. This is necessary because external restrictions complicate the traditional current ratio used to assess liquidity, given that cash that is allocated to specific purposes is restricted and cannot be used to meet a Council’s other operating and borrowing costs (T Corp 2013, p. 73). As a result, externally restricted assets – such as water and sewer assets as well as specific grants and contributions – are excluded.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑒𝑥𝑡𝑒𝑟𝑛𝑎𝑙 𝑟𝑒𝑠𝑡𝑟𝑖𝑐𝑡𝑖𝑜𝑛𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 − 𝑠𝑝𝑒𝑐𝑖𝑎𝑙 𝑝𝑢𝑟𝑝𝑜𝑠𝑒 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Figure 21. Unrestricted Current Ratio

Figure 21 indicates that PMHC has an unrestricted current ratio that meets the benchmark (>1.5) but is below many of its peers. On average, PMHC has recorded an unrestricted current ratio of 2.52, compared to the peer group average of 2.7. As a result, PMHC has ranked relatively poorly in this measure amongst the peer group (13th in 2015-16), though in 2013-14 PMHC scored a relatively strong 3.28, which was ranked 2nd amongst the peer group in this year. It would appear that PMHC is projected to have trouble meeting the benchmark in some years in its Long Term Financial Plan based on a projected negative shock to this measure anticipated for 2017-18.

Nonetheless, it need not be problematic for a growing council to achieve a relatively low result in the unrestricted current ratio owing to a combination of high demand and the high levels of restricted assets. In earlier work for PMHC we empirically demonstrated that reserves were at high but appropriate levels for a council in a high growth area. In any case, the arbitrary benchmark set for this measure need not be adhered to strictly. For instance, PMHC has recently undertaken refinancing activities (extending term),

PMHC =2.27

PMHC =2.96

PMHC =3.28

PMHC =2.21

PMHC =1.88


which, while reducing the performance in this measure, might be expected to ultimately deliver savings to council through more favourable borrowing rates.

5.3.3 Cash Expense Ratio

The cash expense ratio indicates the number of months a council can continue paying for immediate expenses without additional cash inflow.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑐𝑎𝑠ℎ + 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 + 𝑡𝑒𝑟𝑚 𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑠

𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑓𝑟𝑜𝑚 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑜𝑓 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 + 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠

Figure 22. Cash Expense Ratio (months)

Figure 23. Cash Expense Ratio (weeks)

PMHC =21.49

PMHC =20.63

PMHC =15.38

PMHC =16.58

PMHC =10.77

PMHC =93.12

PMHC =89.40

PMHC =66.65

PMHC =71.85

PMHC =46.67


Figure 22 and 23 indicate that PMHC has recorded relatively high results in the cash expense ratio compared to the peer group. On average over the period under examination, PMHC has carried around 17 months capacity to pay for immediate expenses without additional cash inflow. As a result, PMHC recorded the highest cash expense ratio amongst the peer group in all years since 2012-13. It would appear that PMHC expects to continue to exceed the benchmark for this measure going forward according to the Long Term Financial Plan under each scenario, though with some deterioration in the medium term.

The cash expense ratio indicates that PMHC possesses relatively high liquidity, in keeping with the growth profile of PMHC. In turn, it is expected that there will be absolutely no concerns regarding the ability of Council to pay expenses when they fall due based on this analysis.

5.4 Debt and debt recovery

There has been a lot written about the role of debt in providing local government goods and services – most of it extolling the potential of debt, and the need for a bond bank to facilitate better access to same. However, most of this ‘commentary’ is ill-informed, neglects the evidence of sub-national debt crises across the developed world and often is promoted by firms and individuals that have a vested interest in seeing councils take on more debt (see Drew and Grant, 2017 for evidence of the sub-national debt crisis).

Debt is often presented as a source of revenue when, in fact, it is nothing more than a mechanism to bring forward future revenues (at a cost). It is claimed that debt – when it is taken on for long lived infrastructure – can enhance inter-generational equity, however, this claim seems to ignore the fact that the current generation of residents were the beneficiaries of infrastructure paid for in full by previous generations, as well as the potential moral hazard in burdening future generations of local government taxpayers with an impost that they have had no say in. Otherwise stated, in order to achieve the touted inter-generational equity we must necessarily visit inequity on previous generations and risk giving in to the temptation to push current responsibilities onto future generations without their consent. This is particularly problematic where debt is used to fund services currently being consumed3 or when an inappropriate proportion of the costs for long-lived assets are assigned to future generations of taxpayers.

In our analysis, we briefly assess the level of debt (Section 5.4.1) at PMHC and peers, along with debt servicing costs (Section 5.4.2) and debt recovery performance (Section 5.4.3).

5.4.1 Debt levels

Our preferred measure for debt level performance is the nett financial liabilities ratio employed in other states such as Queensland. This ratio provides an indication of the capacity for liabilities held by councils. Queensland employs a benchmark of less than 60 per cent, which seems rather high and arbitrary – we do note that robust empirical methodologies do exist for setting appropriate benchmarks, but unfortunately most

3 This may also occur if debt is used to fund infrastructure which would otherwise have been paid for by current residents, thus freeing up funds for local government goods and services that are consumed in the short term.


authorities employ arbitrary benchmarks that have the potential to lead to poor decision making (see, Drew and Dollery, 2015b).

The nett financial liabilities ratio is computed as follows:

𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑔𝑟𝑎𝑛𝑡𝑠 𝑓𝑜𝑟 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑝𝑢𝑟𝑝𝑜𝑠𝑒𝑠x100

Figure 24. Nett Financial Liabilities Ratio

Figure 24 shows that PMHC has been making steady improvements in its nett financial liabilities ratio over the time period. As can be seen, PMHC has recorded a negative result for the last three financial years, which means that its current assets exceed liabilities. On average, PMHC recorded a ratio of 1.7 per cent, below the average across the peer group of 13.3 per cent. In each year since 2013-14, PMHC has ranked within the top 5 of the peer group for this measure. This suggests that PMHC is in relatively good financial health in this domain.

5.4.2 Debt servicing

The debt service cover ratio measures the availability of operating cash to service debt including interest and principal payments. The benchmark for this ratio set by T Corp is greater than 2.0. The higher the ratio, the greater the capacity for a council to take on and service additional debt. We note, however, that the debt service cover ratio however has a number of limitations – namely that it does not consider other salient liabilities (such as employee entitlements), takes no account of cash and cash equivalents that essentially offset debt, and doesn’t specifically recognise revenue flows.

In any case, the debt service cover ratio remains among the measures employed by OLG, and is computed as follows:

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑠𝑢𝑙𝑡𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑛𝑑 𝑎𝑚𝑜𝑟𝑡𝑖𝑠𝑎𝑡𝑖𝑜𝑛

𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 + 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠

PMHC =-21.59

PMHC =-6.22

PMHC =-6.19

PMHC =16.08

PMHC =26.21


Figure 25. Debt Service Cover Ratio

Figure 25 indicates that PMHC has consistently exceeded the benchmark (>2.0) for each year under examination. On average across the period, PMHC has achieved a debt service cover ratio of 3.3 compared to the peer group average of 4.6. PMHC’s results, however, have been relatively poor with respect to the peer group. In 2015-16 PMHC recorded the 12th highest debt service cover ratio and has been ranked below the median for each of the years under examination. According to the Long Term Financial Plan, PMHC is projected to continue to exceed the benchmark throughout the forward years, with progressive improvements projected over time.

This does not raise a particular concern at present, however it does suggest that PMHC should continue to exercise prudence when using debt.

In combination with Section 5.4.1, this suggests that PMHC is carrying an appropriate level of debt, particularly with reference to other liabilities, current assets and revenue. PMHC should exercise caution if considering further debt funding ensuring that it takes heed of the moral hazard and implications of reduced future revenue according to the demographic risks identified in Section 2.

5.4.3 Debt recovery

It is important for all local governments to follow up on outstanding rates and charges in order to assist liquidity, enhance financial sustainability and ensure equity for all residents and businesses. This debt recovery activity is measured by the ratio of rates and annual charges outstanding. This is computed as follows:

𝑅𝑎𝑡𝑒𝑠 𝑎𝑛𝑑 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐ℎ𝑎𝑟𝑔𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝑅𝑎𝑡𝑒𝑠 𝑎𝑛𝑑 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐ℎ𝑎𝑟𝑔𝑒𝑠 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑏𝑙𝑒x100

PMHC =3.27

PMHC =3.69

PMHC =2.92

PMHC =3.54

PMHC =3.23


Figure 26. Rates and Annual Charges Outstanding

Figure 26 indicates that PMHC has made steady improvements to reduce its rates and annual charges outstanding ratio, consistent with improvements in this respect across NSW. On average across the period under examination PMHC recorded an average of 7.0 per cent compared to the peer group average of 5.9 per cent. PMHC’s ranking amongst the peer group has also improved slightly, achieving a ranking of 11th amongst the peer group in 2015-16, while in the years 2011-12 to 2014-15 PMHC was amongst the bottom three performers within the peer group.

Of particular note has been PMHC’s reduction in bad rates and charges debts over recent years. Since 2014-15 PMHC has reduced the proportion of its rates and charges overdue for over 12 months from 33 per cent to 23 per cent. This level is quite impressive compared to a number of peers – for instance, this is around 29 per cent in Lake Macquarie, around 34 per cent in Tweed Shire, around 45 per cent in Shoalhaven, and around 57 per cent in Port Stephens. One consequence of the improvement in debt recovery – which nonetheless is an important activity – is the reduction in revenue associated with interest payments of overdue payments from residents. Since 2012-13, PMHC’s interest revenue from overdue rates and charges has fallen by an average of 18 per cent year on year.

Based on PMHC’s standing in 2015-16, the rates and charges outstanding measure is now broadly in line with the average measure across the group (5.4 per cent). We would encourage PMHC to continue with its efforts in this area noting that the first quartile performance for the peer group (4.25 per cent) suggests that there is still a little room for potential improvement (although end-users should be cognisant of the fact that failure of local government taxpayers to pay on time could be a function of macro-economic conditions which fall largely outside of the local government’s influence). We note that the Long Term Financial Plan suggests that PMHC is not projected to achieve the benchmark for this measure, and is not anticipated to achieve any substantive improvements in this measure over the medium term.

PMHC =5.21

PMHC =6.30

PMHC =7.13

PMHC =7.73

PMHC =8.70


5.5 Asset management

Asset management remains a critically important aspect of financial sustainability for local governments in Australia, given their exceptionally large asset bases under management. In turn, asset management performance is a determining force for the capacity of a council to provide ‘services desired by the community within the council’s financial capacity’ (OLG 2013, p. 15).

We note that in the OLG’s Infrastructure Audit in 2013 PMHC achieved an infrastructure management rating of ‘moderate’ and in IPART’s Fit for the Future assessment, PMHC did not meet the standard for ‘infrastructure and service management’ though it did achieve the standard for ‘sustainability’ (which was unfortunately confined to operating performance and own source revenue ratios). In any case, we advise that some care should be exercised when making comparisons between PMHC and the peer group for the infrastructure ratios given emerging evidence of gaming among some councils (which may include peers) in response to the Fit for the Future programme.

In this subsection we examine a range of measures that are commonly employed within NSW local government, including in the aforementioned state-wide reviews. In addition, we provide an analysis of depreciation rates in Section 5.4.5, which we believe may be of particular insight for PMHC. It is noted that our measures are generally computed on the basis of the infrastructure portfolio in total rather than split across asset classes. As a result of this is that measures might hide underperformance and overperformance between asset classes.

5.4.1 Infrastructure Backlog

Within NSW local government, significant efforts have been made in recent years to examine performance in infrastructure servicing and delivery, largely in response to demonstrable infrastructure backlogs across the state. The OLG’s Infrastructure Audit (2013, p. 24) notes that infrastructure backlogs may result from:

• A lack of maintenance that causes assets to fall below the agreed level of service and requires earlier renewal efforts – the cost difference between when the renewal would have occurred to when it is incurred is the backlog cost, and/or

• Capital renewal not occurring when programmed.

Within NSW the common measure to assess performance is based upon the estimated cost to ‘bring assets to a satisfactory standard’ (BTS). In turn, the infrastructure backlog ratio is computed as follows:

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑐𝑜𝑠𝑡 𝑡𝑜 𝑏𝑟𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑜 𝑎 𝑠𝑎𝑡𝑖𝑠𝑓𝑎𝑐𝑡𝑜𝑟𝑦 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑

𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑓𝑟𝑎𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒 𝑎𝑠𝑠𝑒𝑡𝑠x100


Figure 27. Infrastructure Backlog Ratio

Figure 27 indicates that PMHC has regularly exceeded the benchmark (< 2 per cent) across the period examined, though performance has improved in 2014-15 and 2015-16. Over this time, PMHC has averaged an infrastructure backlog ratio of 9.9 per cent, above the peer group average of 6.6 per cent. PMHC’s Long Term Financial Plan suggests that only modest improvements to this measure are projected across the medium term and that the benchmark is not anticipated to be met over this period.

Nonetheless, most of PMHC’s peers have also not reached the benchmark in most years. For instance, in 2015-16 only 4 councils amongst the peer group achieved the benchmark of 2 per cent, and in 2013-14 only one council did. It is understood that this measure is likely to remain difficult to achieve because of the need to build new infrastructure to accompany the relatively high rates of growth in the area. It is probably most important to focus on reducing the size of the numerator in this metric rather than the metric itself.

5.4.2 Asset Maintenance

Asset maintenance is an essential activity for local governments to ensure assets continue to meet their service delivery requirements. Deficiencies in maintenance expenditure may indicate that insufficient funds are being invested to address any infrastructure backlog. Moreover, it is important to ensure that adequate maintenance of assets is undertaken given that ‘the cost of maintenance … generally increases exponentially when planned and cyclic maintenance is not carried out’ and that ‘inadequate maintenance may result in a shortened useful life of the asset and the need for earlier than planned renewal’ (OLG, 2013, p. 52).

The gap between actual maintenance and required maintenance indicates the difference between what individual councils’ asset management plans project should be spent on infrastructure to keep it in its existing condition and what they actually spend (OLG 2015).

In turn, the measure is computed as follows:

PMHC =6.89

PMHC =7.31

PMHC =13.06

PMHC =11.38

PMHC =10.90


𝐴𝑐𝑡𝑢𝑎𝑙 𝑎𝑠𝑠𝑒𝑡 𝑚𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒

𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑎𝑠𝑠𝑒𝑡 𝑚𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒

T Corp (2013, p. 70) notes that a ratio of above 1.0x indicates that the Council is investing enough funds within the year to stop the Infrastructure Backlog from growing.

Figure 28. Asset Maintenance Ratio

Figure 28 indicates that PMHC has made steady improvements in this measure in recent years. In particular, we note that PMHC increased the size of the numerator in this metric last year and believe that this is where emphasis should be placed in future years – increasing the quantum of actual asset maintenance in a steady manner (at a rate slightly faster than the Local Government Cost Index), rather than trying to achieve an arbitrary benchmark that councils in high growth areas will always struggle to satisfy.

Despite PMHC’s improvement in its ratio in recent years, the peer group has also improved its performance. For 2015-16 PMHC recorded an asset maintenance ratio of 0.87, compared to the peer group average of 1.05. As a result, PMHC achieved a ranking of 15th in this measure for 2015-16 (only scoring better than Albury, on 0.82). Going forward, PMHC has projected to continue to fall short of the benchmark for this measure into the medium term (excepting into the latter years under the more optimistic Scenario 3) in the Long Term Financial Plan. Council’s revision of the Special Schedule 7 in the 2014-15 financial year is a good first step to addressing this ratio.

5.4.3 Building and Infrastructure Renewal

The building and infrastructure renewal ratio assesses the rate at which assets are being renewed against the rate at which they are depreciating. Renewal is defined as the replacement of existing assets to equivalent capacity or performance capability, as opposed to the acquisition of new assets. 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 (T Corp, 2013, p. 71).

PMHC =0.87

PMHC =0.86

PMHC =0.45

PMHC =0.41

PMHC =0.39


The measure employed is computed as follows:

𝐴𝑠𝑠𝑒𝑡 𝑟𝑒𝑛𝑒𝑤𝑎𝑙𝑠

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, 𝑎𝑚𝑜𝑟𝑡𝑖𝑠𝑎𝑡𝑖𝑜𝑛 𝑎𝑛𝑑 𝑖𝑚𝑝𝑎𝑖𝑟𝑚𝑒𝑛𝑡x100

A result of greater than 100 is considered satisfactory. While results below the benchmark generally indicate that councils need to increase funding on infrastructure renewal to maintain assets, renewal of assets depends on the types of services and level of services to be provided in the future, as well as the age and condition of the asset. As a result, the renewal expenditure may vary from year to year.

Figure 29. Buildings and Infrastructure Renewal Ratio

Figure 29 indicates that PMHC has generally lagged well below the benchmark level (>100%) though performance improved markedly in 2015-16. At the current level PMHC is broadly comparable to the peer group average of around 90 per cent. PMHC’s ranking for 2015-16 also represents an improvement relative to the peer group (9th) compared to 2014-15 and 2013-14 where PMHC was ranked 15th. PMHC’s Long Term Financial Plan anticipates that the benchmark for this measure is not projected to be met into the medium term, and indeed it is projected to deteriorate further over time.

5.4.4 Capital expenditure

The capital expenditure ratio 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 (T Corp 2013, p. 71). In turn, the measure is computed as follows:

𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

PMHC =79.41

PMHC =36.09

PMHC =31.63

PMHC =41.50

PMHC =20.40


Figure 30. Capital expenditure ratio

Figure 30 indicates that PMHC has exceeded the benchmark (>1.0) in three of the four years under examination – noting that this measure was not taken for 2015-16 as it is no longer reported in Special Schedule 7. At the current level, PMHC remains well below the peer group average of 1.31 and is ranked at 11th for 2015-16. The strongest performance for this measure was recorded in 2012-13, where PMHC achieved the 5th highest capital expenditure ratio.

5.4.5 Depreciation Rate

We choose to employ a measure of depreciation performance given its critical importance to the calculation of a number of other performance indicators and general financial outcomes. A measure of this kind is intended to offer indications of potential inconsistent depreciation practice, though we advise that the measure should not considered to be definitive in and of itself.

In any case, we reiterate that it is most important that depreciation has an association with the actual consumption of durable assets, rather than being set to be consistent with other councils or calculated in terms of a formula. Moreover, differences in council practice (such as recognition thresholds and the like) have the potential to slightly confound analysis. However, it is also true that councils which have relatively high rates of depreciation will look far worse than their peers on a number of metrics – when these metrics are used to inform public policy interventions then relatively high rates of depreciation may disadvantage communities (as it did in Fit for the Future). In turn, this validates our assessment of relative depreciation rates as a component of performance and financial sustainability.

The measure we employed is computed as follows:

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑖𝑛𝑓𝑟𝑎𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒, 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦, 𝑝𝑙𝑎𝑛𝑡 𝑎𝑛𝑑 𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡

PMHC =1.02

PMHC =1.17

PMHC =1.38

PMHC =0.84


In order to make this measure as informative as possible, we compute the measure not just for the overall asset base, but also for each of the major asset classes. By comparing the depreciation rate across the asset classes, this provides indications for possible under- or over-depreciation of particular assets, which may inform evaluation of a council’s depreciation schedules. In turn, this has the potential to impact on a range of areas of financial performance.

Figure 31. Depreciation Rate

Figure 31 indicates that PMHC’s rate of depreciation is particularly high relative to its peers. In 2015-16, PMHC’s depreciation rate recorded 3.33 per cent compared to the average across the peer group of 2.78 per cent, and median of 2.74 per cent. For 2015-16 PMHC achieved the 14th lowest depreciation rate amongst the peer group, recording its lowest ranking out of the years under examination, worsening from a ranking of 6th in 2011-12 and 2012-13.

To identify precisely where discrepancies might exist we worked out the depreciation rate for each individual class of depreciable assets (for example, plant and equipment, roads, bridges, buildings etc) for 2015-16. We found instances of significant deviations from common practice which potentially point to both under-estimates and over-estimates of depreciation.

PMHC =3.44

PMHC =2.31

PMHC =2.99

PMHC =2.62

PMHC =2.96


Figure 32. Potentially Under-estimated Depreciation Items

The main items where under-estimate may be occurring are:

• Plant and equipment: PMHC recorded a depreciation rate of 10.2 per cent compared to the median for the peer group of 15.27 per cent.

• Depreciable land improvements: PMHC recorded a depreciation rate of 4.91 per cent compared to the peer group median of 6.25 per cent.

• Buildings: PMHC recorded a depreciation rate of 1.52 per cent, compared to the peer group median of 2.49 per cent.

The problem with under-estimating depreciation (should this be indeed occurring) is that it shifts costs onto future years, either through extended periods of depreciation or loss on disposal of assets (Marquardt and Wiedman, 2004).

PMHC = 10.2

PMHC = 4.9

PMHC = 1.52


Figure 33. Potentially Over-estimated Depreciation Items

Potentially over-estimated items dominate our analysis based on asset class for 2015-16 and represent over three-quarters of PMHC depreciable assets. These items include:

• Roads: PMHC recorded a depreciation rate of 3.02 per cent compared to the peer group median of 2.93 per cent

• Bridges: PMHC recorded a depreciation rate of 2.40 per cent compared to the peer group median of 1.58 per cent

• Footpaths: PMHC recorded a depreciation rate of 2.93 per cent compared to the peer group median of 2.64 per cent

• Stormwater: PMHC recorded a depreciation rate of 2.54 per cent compared to the peer group median of 1.48 per cent

• Water: PMHC recorded a depreciation rate of 3.91 per cent compared to the peer group median of 2.22 per cent

• Sewer: PMHC recorded a depreciation rate of 3.05 per cent compared to the peer group median of 2.29 per cent

The problem with accelerated depreciation is that it might not reflect the consumption of the asset accurately, and paints a far worse picture of performance than may be warranted (and this may lead to public policy interventions which disadvantage the community).

When we re-estimate the quantum of depreciation for PMHC according to the median rate for each asset class, the re-estimate is $8.487 million below the depreciation recorded for 2015-2016. Nonetheless, we re-iterate that it is not appropriate to simply reset depreciation rates for each class of items back to the median. Instead, it may be appropriate to review depreciation schedules to see whether they accurately represent

PMHC = 3.02

PMHC = 2.4

PMHC = 2.93

PMHC = 2.54

PMHC = 3.91

PMHC = 3.05


the consumption of assets. It would seem particularly important to do such a review given the projects which will soon come on-line in response to growth in the council area. What we have done by conducting a class-based analysis is to point PMHC to the areas which seem most likely to require adjustments in their depreciation schedules.

We also draw PMHC’s attention to the fact that it appears to have particularly high carrying value of buildings, and depreciable land improvements relative to the peer group. If opportunities exist to rationalise the assets this would improve Council’s long-term sustainability.

5.6 Summary of financial management relative performance measures

Within this Section, we have analysed a range of financial management measures. We summarise PMHC’s relative performance among our performance metrics in Table 6.


Table 6. Summary of relative performance across financial management measures

2011-

12 2012-

13 2013-

14 2014-

15 2015-16 Comments

Budget accuracy

Revenue accuracy

4th 10th 14th 4th 14th

Variable performance,

deterioration in 2015-16

Expenditure accuracy

2nd 4th 7th 14th 9th

Below average performance,

deterioration in 2014-15

Revenue and

service level

Own-source ratio

6th 3rd 3rd 8th 4th Above

average performance

Nexus ratio 6th 6th 7th 5th 8th Below average performance

Liquidity

Unrestricted current ratio

13th 11th 2nd 8th 13th

Deterioration in this

measure since 2014-15

Cash expense ratio

4th 1st 1st 1st 1st Excellent

performance

Debt levels and

servicing

Net financial liabilities ratio

13th 10th 3rd 5th 4th Above

average performance

Debt service ratio

10th 8th 9th 10th 12th Below average performance

Debt recovery

Rates and annual charges

outstanding ratio



modest improvements

over time

Asset manage

ment

Infrastructure backlog ratio



modest improvements

made since 2014-15

Asset maintenance

ratio 13th 14th 16th 14th 15th

Low level of performance

Infrastructure and building renewal ratio



modest improvement

made in 2015-16

Capital expenditure

ratio 12th 5th 10th 11th -

Below average performance

Depreciation rate

6th 6th 12th 9th 14th Deterioration

in performance over time


6. Concluding Remarks

Throughout this report we have analysed a wide range of performance measures with reference to assessing PMHC’s financial sustainability. We have noted on several occasions the importance of evaluating against a range of performance dimensions rather than focus on single measures solely. Indeed, there are certainly measures within the report that we would consider to be of relatively more and less importance for PMHC’s attention, for which we have indicated where appropriate. We have summarised the relative performance in financial ratios to the comparable peer group in Tables 2 and 6 and for detailed comparisons of actual measures in raw terms we have provided detailed tables in Appendix A to E.

It is advised that PMHC continue to assess its sustainability against its own performance over time, and with regard to comparable peers. Prudent interventions to steadily improve performance over time are the best way to guarantee long-term financial sustainability of PMHC. Going forward, it will be increasingly important to ensure appropriate steps are in place to guard against the demographic risks to financial sustainability discussed throughout this report.

Having considered the scope of the measures employed in this report, we consider that, overall, the financial sustainability of PMHC is relatively strong and particularly impressive given the current operating environment. In this Section, we provide some suggestions for possible actions to improve financial sustainability going forward and to highlight the areas for further attention for PMHC going forward.

6.1 Possible Actions to Improve Financial Sustainability

6.1.1 Budget Accuracy

Poor budget accuracy can result in poor information to management, which can result in poor financial and operational decision-making. In turn, it will continue to be necessary to ensure that the causes of budget inaccuracies are monitored over time and actions taken to improve this. To date, we do not suggest that inaccuracies have contributed to poor decision-making at PMHC, however keeping this in check should be a priority going forward.

6.1.2 Staff Expenditure

PMHC will benefit from efforts to arrest the rate of increase to staff expenditure to levels commensurate with its peers in order to avoid long-term financial sustainability pressures. This is not a suggestion to decrease staff expenditure (which would be difficult for a council operating in a growth area), but to endeavour to contain growth in expenditure such that it more closely reflects growth in number of assessable properties. As a result, necessary changes to staffing should be guided by growth in development, demand for services, and the quality of service being delivered.


6.1.3 Outstanding Rates and Annual Charges

PMHC has been steadily improving this metric over recent years. It would seem that there remains some scope for continued improvement, subject to changes in the macro-economic environment, and we therefore encourage continued efforts here. That said, efforts have clearly been made to reduce the proportion of bad debts within the outstanding rates and charges – which are the most problematic of outstanding amounts – to the point where this is somewhat lower than compared to several peers.

6.1.4 Fees and Charges

The need to enhance nexus to promote financial sustainability has been expressed throughout this report. We first offer some general principles to consider for appropriate pricing and revenue capture, before providing comment on a few potential options.

6.1.4.1 Revenue principles in local government

Where fees and charges are applied for non-public goods, PMHC will benefit from ensuring that they are at appropriate levels. Namely, for services in which there are equivalent offerings provided by other entities in the local government area then price benchmarking should be applied (a demand-side approach that prices the service at the commercial rate; for example, hall hire). Where services are not provided by other suppliers in the local government area then prices should be set at the long-run marginal cost (a supply-side approach; see, for example, Grant and Drew, 2017) – essentially this is approximately the unit cost of production.

For merit goods the level of subsidium should be reviewed to ensure that it is at the minimum amount required to ensure efficient levels of consumption – any higher than this results in inequity for local government taxpayers and erodes financial sustainability. Moreover, the level of subsidium should be communicated to local government consumers at point of consumption to ensure that an adequate price signal is sent to inform consumption decisions. This could be as simple as a short statement on say a swimming pool entrance ticket ‘entry charge $x, cost to local government ratepayers per entry $y’.

PMHC might also review whether it would not be more appropriate to provide variable levels of subsidies which respond to the circumstances of individual resident consumers. For instance, a pool entry charge may be set at different rates which reflect actual need and willingness to pay. This kind of variable charge would ensure that subsidium achieves its purpose – to ensure efficient levels of consumption according to identifiable need.

Economic theory suggests that efficiency and equity is optimised where the local government tax pool is used to only fund public goods, the subsidium component of merit goods and the component required to ensure that positive externality goods are consumed at optimum levels. Failure to follow these well-established principles results in a severing of the nexus between demand and the revenue required to meet demand – this lowers long-term financial sustainability as well as acting to elevate demand beyond efficient levels. Otherwise stated, wherever a private benefit is gained, an appropriate fee should be levied.


The levying of appropriate fees also acts to mitigate the well-known free-rider problem. An example of this is a regional airport. If people from neighbouring local government areas regularly use the airport then this essentially means that they are free-riders (people who consume goods without paying for them). Free-riding results in economically inefficient levels of expenditure and inequity (for the residents of the council which owns the airport). To address this problem councils can receive a transfer from the neighbouring local government area (unlikely but not unprecedented) or council can levy a charge on outbound non-residents (the simplest way to do this is probably through a car park fee).

It is also important that new services and service upgrades have ongoing funding associated with them, ideally in a way that establishes or strengthens nexus. One area which is sometimes neglected is to ensure that an identified stream of revenues is created to cover the opex for major new capital projects (such as aquatic centres and the like), once again sticking to pricing principles, the principle of subsidiarity and the concept of nexus.

6.1.4.2 Some fees and charges observations

Car parking revenue would appear to be an area for potential gains to PMHC’s nexus. Despite being unpopular at times, paid parking is a necessity – particularly in central areas and recreational areas such as the beach and sporting areas. It is particularly necessary because many users of, say, the beach precinct, may be non-residents (such as tourists) who do not contribute to costs of operating the beach and use of the roads. Indeed, many similar councils employ paid parking in areas where appropriate. For instance, Byron Shire employs paid parking and received around $3.5 million in parking revenue in 2016-17 (around $341 per occupied residential property). An option could be to offer permits to some residents to allow the parking fee burden to be shifted to non-residents of PMHC local government area. We reinforce that the introduction of paid parking should be principally motivated toward capturing revenue from users that do not otherwise pay – such as non-residents and non-ratepaying residents – rather than simply increasing revenues per se.

Ferry services have been the subject of recent updates to fees and charges. It will be important that pricing of these services overall broadly reflects the cost of providing services. A potential problem is the large concessional rates that presently exist in ferry services, which can erode the viability of this operation through the loss of nexus. In lieu of improving nexus through revenue capture, the alternative is to reduce services. It would thus seem appropriate to review the rate of concession, as well as ensuring, for instance, that there is suitable assurance that concession recipients are indeed final users of the service, and such concessions are not transferrable.

PMHC has enjoyed a flourishing tourism trade for some time. In the process, the capacity for private sector operators – who are principally the beneficiaries of tourism – has increased. At the same time, however, PMHC – who receive little revenue gains from tourism – have continued to contribute to tourism promotion and advocacy activities, as well as operating a visitor information centre. Given that the benefits of tourism activity are concentrated within the private sector it is appropriate that these operators make sufficient contribution to tourism promotion, in order to increase nexus accordingly. This action could improve nexus by either reducing PMHC’s tourism expenditure as well as earning or collecting fees from operators to fund the tourism activity.


In common with many regional airports in NSW, the fees associated with car parking are significantly lower than commercial operators in metropolitan areas. Compared to its peers, PMHC’s fees for airport car parking are broadly similar in terms of customer rates, however there are some differences in the pricing structure in other areas. For instance, at Coffs Harbour only the initial 15 minutes is free of charge (compared to 30 mins at PMHC) and there is no free entry period at Ballina-Byron airport (a minimum of $2 is collected per entrant). PMHC may wish to consider if it may be appropriate to adjust pricing structures accordingly. It may also be possible to increase revenue through structured pricing rates based upon the period of stay, rather than a fixed hourly and daily rate only. The escalating scale in fees might be expected to disproportionately impact upon non-residents and, in turn, will also improve nexus.

An increase in the proportion of revenue from burial and cremation fees is an unfortunate reality. In comparison to similar councils, PMHC’s fee structure is broadly in a similar range to Coffs Habour and Kempsey, for instance, but lower than in others, such as Byron Shire and Tweed Shire. Over time, it would seem appropriate that fees associated with such services may increase accordingly.

6.1.5 Advocacy

PMHC may wish to get involved in existing efforts aimed at reforming FAG distributions (Local Government New South Wales (LGNSW) was doing some work in this space) and cost-shifting (LGNSW has been working here for some time as is the Australian Local Government Association ALGA). FAG distributions that do not reflect HFE principles embodied in the enabling legislation are a particular source of disadvantage for PMHC. We have also argued that future potential areas for cost-shifting would hit PMHC harder than many other councils – particularly in relation to aged services and pensioner discounts – so PMHC should remain vigilant on these fronts.

6.1.6 Debt

As noted there are a number of reasons for PMHC to exercise caution if considering new debt – demographic challenges and moral hazard being the chief among these concerns. Our cash flow analysis suggests that PMHC has been making good progress in this area since coming out of administration, and we encourage continued negative cash flows for financing.

6.1.7 Depreciation

As we have noted earlier it is critical for depreciation schedules to accurately reflect the consumption of durable assets. Our analysis points to the possibility that some items are current being under-depreciated, whilst others are over-depreciated (certainly with respect to the peer group). We recommend that PMHC further investigate the nominated classes of assets to ensure that depreciation schedules do reflect consumption and that practices are broadly consistent with peers.

We also noted that Council seems to have a high carrying value of building assets, relative to its peers. PMHC may therefore benefit from examining opportunities to rationalise building assets wherever possible.


6.2 Final comments

In general, PMHC has clearly done some important work in recent years to improve its financial sustainability. We believe that focussing on the aforementioned areas of potential improvement will help it to continue to strengthen its financial sustainability in the years to come. There is no quick fix to financial sustainability and the best course is continued prudent management. Moreover, in all areas of performance there are trade-offs to be made. We think that PMHC has largely managed these trade-offs as well as might be expected for a council operating in its particular environment and with the legacy inherited from previous administrations.


References

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Coelli, T., Rao, P., O’Donnell, C. and Battese, G. 2005, An Introduction to Efficiency and Productivity Analysis, Springer: New York.

Cooper, W., Seiford, L. and Tone, K. (2007), Data Envelopment Analysis. Springer, New York.

DeBruijn, H. and G. van Helden (2006). ‘A Plea for Dialogue Driven Performance-Based Management Systems: Evidence From the Dutch Public Sector.’ Financial Accountability & Management 22(4): 405-423.

Drew, J. and Campbell, N. (2016). Autopsy of Municipal Failure: The Case of Central Darling Shire. Australasian Journal of Regional Science, 22(1): 81-104.

Drew, J. and Grant, B. (2017). Subsidiarity: More Than a Principle of Decentralisation – A View from Local Government. Publius, 47(4): 522-545.

Drew, J., Kortt, M. and Dollery, B. (2015a). Peas in a Pod: Are Efficient Municipalities Also Financially Sustainable? Australian Accounting Review, 77(26): 122-131.

Drew, J., Kortt, M. and Dollery, B. (2015b). No Aladdin’s Cave in New South Wales? Local Government Amalgamation, Scale Economies and Data Envelopment Specification. Administration & Society, DOI: 10.1177/0095399715581045.

Drew, J., Kortt, M. and Dollery, B. (2015c). ‘What Determines Efficiency in Local Government? A DEA Analysis of NSW Local Government’. Economic Papers, 34(4): 243-256.

Drew, J. and Dollery, B. (2015a) Less Haste More Speed: The Fit for Future Reform Program in New South Wales Local Government. Australian Journal of Public Administration, 75(1): 78-88.

Drew, J. and Dollery, B. (2015b) How High Should They Jump? An Empirical Method for Setting Municipal Financial Ratio Performance Benchmarks. Australian Journal of Public Administration, 75(1): 53-64.

Drew, J. and Dollery, B. (2016). Summary Execution: The Impact of Alternative Summarization Strategies on Local Governments. Public Administration Quarterly, 40(4): 814-841.

Feiock, R., Carr, J. and Johnson, L. (2006). Structuring the Debate on Consolidation: A Response to Leland and Thurmaier. Public Administration Review, March/April: 274-278.


Grant, B. and Drew, J. (2017). Local Government in Australia: History, Theory and Public Policy. Springer Palgrave, Singapore.

Independent Local Government Review Panel (ILGRP). (2012). Better, Stronger Local Government: The Case for Sustainable Change. ILGRP: Sydney.

Independent Local Government Review Panel (ILGRP). (2013), Revitalising Local Government: Final Report of the NSW Independent Local Government Review Panel. ILGRP: Sydney.

Marquardt, C. and Wiedman, C. (2004), How Are Earnings managed? An Examination of Specific Accruals. Contemporary Accounting Research, 21(2): . 461-491.

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Port Macquarie-Hastings Council (2017). Resourcing Strategy 2017-21. PMHC: Port Macquarie.

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Appendices

Appendix A: Detailed tables: financial ratios, consolidated funds


2015-16

PMHC PEER GROUP

MEAN MIN MAX S.DEV Q 1 MEDIAN Q 3

Operating Performance ratio 7.44 3.16 -13.90 12.98 6.10 0.45 4.14 6.05

Own Source ratio 63.50 72.23 53.64 81.94 8.32 67.83 73.74 78.88

Unrestricted Current ratio 2.27 3.06 1.45 4.20 0.72 2.52 3.23 3.44

Debt Service ratio 3.27 5.59 1.79 21.28 4.47 3.27 4.43 6.53

Rates and Annual Charges Outstanding 5.21 5.41 2.43 10.80 2.33 4.25 4.69 5.92

Nett Financial Liabilities ratio -21.59 1.09 -39.67 74.39 30.27 -18.74 -3.95 14.19

Cash Expense ratio 21.49 11.10 3.42 21.49 4.67 7.95 10.14 13.82

Cash Expense ratio (weeks) 93.12 48.09 14.82 93.12 20.22 34.45 43.92 59.88

Building and Infrastructure Renewals ratio 79.41 71.43 0.84 156.05 42.83 37.67 69.46 93.63

Infrastructure Backlog 6.89 6.82 0.00 30.64 8.04 2.02 3.17 8.28

Asset Maintenance ratio 0.87 8.41 0.82 119.00 28.55 0.95 1.01 1.09

Depreciation Rate 3.33 2.78 1.83 3.75 0.53 2.51 2.74 3.11

Nexus (%) 51.31 46.49 23.61 62.27 12.78 37.16 49.88 56.37

Capital expenditure ratio N/A N/A N/A N/A N/A N/A N/A N/A

Non-Rd (non-water and non-sewer) Opex Per Assessment 2.08 2.64 2.08 3.40 0.44 2.20 2.57 3.06

Road Opex per Kilometre 19.63 20.86 3.97 39.75 9.37 16.89 20.13 23.33

Water Opex per connection 0.87 0.67 0.37 0.87 0.16 0.71

Sewer Opex per connection 0.87 0.87 0.51 1.33 0.27 0.86

Deviation from Budgetted Rev (%) 39.53 17.95 6.16 45.06 12.91 9.00 11.66 21.09

Deviation from Budgetted Exp (%) 3.05 2.37 -6.22 12.92 5.43 -1.24 1.03 5.84


2014-15

PMHC PEER GROUP


Operating Performance ratio 3.71 0.74 -6.85 14.53 5.30 -2.77 0.43 4.09

Own Source ratio 74.82 73.95 55.36 82.94 7.29 68.88 74.99 80.26




Nett Financial Liabilities ratio -6.22 7.82 -36.29 90.15 30.94 -9.33 2.16 17.55







Nexus (%) 51.73 44.02 22.52 61.20 11.82 37.54 47.56 51.83

Capital expenditure ratio 1.02 1.31 0.69 3.05 0.59 0.84 1.23 1.39





Deviation from Budgetted Rev (%) -4.90 12.78 -4.90 44.46 11.59 4.89 12.52 17.58

Deviation from Budgetted Exp (%) -10.26 4.61 -10.26 39.12 10.69 -2.54 2.75 8.27


2013-14

PMHC PEER GROUP


Operating Performance ratio -6.88 -5.36 -16.46 4.03 6.58 -11.10 -4.26 -0.32

Own Source ratio 68.66 75.04 50.36 86.54 8.55 70.11 76.64 80.57




Nett Financial Liabilities ratio -6.19 19.23 -24.93 129.22 36.88 -3.37 10.65 24.08







Nexus (%) 48.57 43.71 23.60 59.81 11.87 33.53 47.49 52.32






Deviation from Budgetted Rev (%) 23.49 12.54 -1.17 36.25 9.77 5.21 10.53 17.74

Deviation from Budgetted Exp (%) 2.66 3.31 -6.62 13.74 5.07 0.17 2.37 6.71


2012-13

PMHC PEER GROUP



Own Source ratio 66.83 75.12 53.00 85.32 7.90 70.51 76.16 80.32




Nett Financial Liabilities ratio 16.08 16.81 -34.20 133.19 37.66 -0.10 9.36 30.48







Nexus (%) 46.82 42.33 24.68 65.71 11.54 33.63 43.62 50.37







Deviation from Budgetted Exp (%) -2.94 4.69 -6.25 14.99 6.43 -0.76 4.94 8.44


2011-12

PMHC PEER GROUP



Own Source ratio 72.11 74.51 63.19 82.52 4.53 71.70 74.18 76.34




Nett Financial Liabilities ratio 26.21 21.74 -28.01 154.82 40.13 1.13 13.22 22.35







Nexus (%) 45.34 40.47 23.56 55.62 10.05 32.52 44.42 46.36







Deviation from Budgetted Exp (%) 1.61 -0.01 -89.57 17.55 23.84 3.63 4.58 7.89


Appendix B: Detailed tables: financial ratios, disaggregated – general fund

2015-16

PMHC PEER GROUP

MEAN MIN MAX S.DEV MEDIAN

Operating performance 7.2 1.8 -14.1 10.9 6.8 3.8

Own source operating revenue 57.5 67.6 50.9 77.6 8.1 68.5

Unrestricted current ratio 2.3 3.0 1.5 4.1 0.8 3.3

Debt service cover ratio 3.3 4.7 3.3 6.3 0.9 4.8

Rates and annual charges outstanding percentage 5.1 4.8 4.6 5.1 0.3 4.8

Cash expense cover ratio 17.3 8.7 2.8 17.3 4.3 8.6

Building and infrastructure renewals ratio 129.7 90.2 32.1 165.9 39.8 99.5

Infrastructure backlog 11.2 9.8 0.0 39.4 12.4 3.0

Asset maintenance ratio 0.8 1.0 0.8 1.1 0.1 1.0


2014-15

PMHC PEER GROUP












2013-14

PMHC PEER GROUP


Operating performance -2.0 -6.6 -17.9 -0.2 5.7 -5.1










Appendix C: Detailed tables: financial ratios, disaggregated – water fund

2015-16

PMHC PEER GROUP












2014-15

PMHC PEER GROUP












2013-14

PMHC PEER GROUP


Operating performance -6.1 3.1 -13.8 19.6 10.9 -0.9










Appendix D: Detailed tables: financial ratios, disaggregated – sewer fund

2015-16

PMHC PEER GROUP












2014-15

PMHC PEER GROUP


Operating performance -0.8 1.8 -24.1 25.3 15.3 -1.1










2013-14

PMHC PEER GROUP


Operating performance -28.8 -5.3 -28.8 17.3 15.0 -6.9










Appendix E: Demographic measures

2015-16

PMHC PEER GROUP


Population 79905 90152 32790 211201 52657 58790 72880 95538

Population growth 1.24% 1.07% -0.31% 2.17% 0.51% 0.88% 1.21% 1.28%

Growth in total assessments (%) 1.13% 1.07% 0.19% 2.83% 0.62% 0.72% 1.02% 1.29%

Growth in residential assessments (%) 1.24% 1.19% 0.20% 3.10% 0.68% 0.78% 1.15% 1.40%

Growth in business assessments (%) -0.14% 0.18% -1.92% 2.81% 0.96% -0.28% 0.13% 0.40%

Density 21.0 171.8 6.1 856.8 218.2 31.5 75.5 219.6

U15 17.2 18.7 16.8 22.3 1.6 17.2 18.5 19.5

O65 26.6 19.7 13.7 26.6 3.8 16.8 19.0 22.6

ATSI 3.3 3.6 1.8 8.4 1.5 2.9 3.4 4.2

NESB 2.3 5.4 2.0 16.7 3.7 3.3 4.1 5.9

Median Income $ 47,521 $ 52,316 $ 45,428 $ 61,706 $ 5,122 $ 47,791 $ 51,206 $ 56,245

Aged Pension (%) 20.1 14.0 9.9 20.1 3.0 12.1 13.1 16.0

Disability Pension (%) 4.7 4.8 3.6 6.7 0.7 4.3 4.6 5.1

Newstart (%) 3.7 3.8 2.7 6.3 0.9 3.2 3.6 4.0

Single Parent Pension (%) 1.3 1.4 1.1 2.2 0.3 1.3 1.4 1.6


2014-15

PMHC PEER GROUP


Population 78,925 89,248 32,344 209,123 52,326 58,247 72,045 94,206




Growth in business assessments (%) -0.10% 0.54% -1.14% 3.18% 1.19% -0.33% 0.29% 1.21%

Density 21.0 171.8 6.1 856.8 218.2 31.5 75.5 219.6

U15 17.2 18.7 16.9 22.1 1.6 17.2 18.6 19.4

O65 26.1 19.3 13.5 26.1 3.7 16.6 18.7 22.0

ATSI 3.3 3.6 1.8 8.4 1.5 2.9 3.4 4.2

NESB 2.3 5.4 2.0 16.7 3.7 3.3 4.1 5.9

Median Income $ 45,716 $ 51,105 $ 44,383 $ 60,952 $ 5,372 $ 45,949 $ 50,066 $ 54,793

Aged Pension (%) 19.9 13.8 9.9 19.9 3.0 12.0 13.0 15.7


Newstart (%) 4.0 4.0 2.8 6.9 1.0 3.3 3.9 4.2



2013-14

PMHC PEER GROUP


Population 78,000 88,377 31,920 207,036 51,957 57,693 71,317 93,087


Growth in total assessments (%) 0.75% 0.94% -0.35% 1.95% 0.65% 0.61% 0.76% 1.58%

Growth in residential assessments (%) 0.89% 1.01% -0.38% 2.01% 0.69% 0.59% 0.87% 1.67%

Growth in business assessments (%) 0.48% 1.78% -2.60% 15.12% 3.82% 0.11% 0.61% 1.92%

Density 20.8 163.1 6.0 740.9 195.4 31.4 74.6 215.7

U15 17.4 18.7 16.9 21.9 1.5 17.4 18.6 19.4

O65 25.8 19.0 13.3 25.8 3.7 16.0 18.4 21.6

ATSI 3.3 3.6 1.8 8.4 1.5 2.9 3.4 4.2

NESB 2.3 5.4 2.0 16.7 3.7 3.3 4.1 5.9

Median Income $ 44,496 $ 49,640 $ 42,386 $ 59,231 $ 5,574 $ 44,785 $ 48,857 $ 53,352

Aged Pension (%) 19.5 13.5 9.6 19.5 2.9 11.5 12.8 15.1


Newstart (%) 3.9 3.9 2.6 7.1 1.1 3.2 3.8 4.1



2012-13

PMHC PEER GROUP


Population 77,003 87,465 31,523 205,100 51,557 57,036 70,547 92,123

Population growth 0.97% 1.00% 0.01% 2.65% 0.53% 0.75% 0.94% 1.09%



Growth in business assessments (%) -0.63% 1.29% -0.76% 10.05% 2.55% 0.02% 0.55% 1.18%

Density 20.6 165.1 6.0 841.5 212.3 31.2 73.5 203.1

U15 17.5 18.8 17.0 21.9 1.5 17.5 18.6 19.7

O65 25.4 18.6 13.1 25.4 3.7 15.6 18.0 21.4

ATSI 3.3 3.6 1.8 8.4 1.5 2.9 3.4 4.2

NESB 3.7 5.8 2.3 14.3 2.8 4.1 4.8 6.5

Median Income $ 42,164 $ 47,692 $ 40,633 $ 57,443 $ 5,562 $ 42,558 $ 47,418 $ 51,393

Aged Pension (%) 19.3 13.3 9.4 19.3 2.8 11.4 12.8 14.7


Newstart (%) 3.7 3.7 2.5 7.1 1.1 3.0 3.6 3.8



2011-12

PMHC PEER GROUP


Population 76,266 86,639 31,099 203,283 51,202 56,493 69,811 91,224

Population growth 1.37% 0.97% 0.10% 3.10% 0.63% 0.64% 0.86% 1.07%



Growth in business assessments (%) 0.53% -0.69% -13.97% 3.33% 4.34% -0.22% 0.58% 1.14%

Density 20.3 165.7 5.9 828.8 210.7 31.1 72.8 206.9

U15 17.6 18.9 16.9 21.8 1.5 17.6 18.7 19.8

O65 24.9 18.2 12.8 24.9 3.6 15.2 17.7 21.2

ATSI 3.3 3.6 1.8 8.4 1.5 2.9 3.4 4.2

NESB 2.3 5.4 2.0 16.7 3.7 3.3 4.1 5.9

Median Income $ 39,939 $ 45,173 $ 38,367 $ 53,520 $ 5,098 $ 40,237 $ 44,823 $ 48,856

Aged Pension (%) 18.8 13.0 9.1 18.8 2.8 11.2 12.6 14.3


Newstart (%) 3.1 3.2 1.9 6.4 1.1 2.5 3.1 3.3


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