Reading the Signs

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Larry O’Connor

Reading the Signs Summary Report of Key Findings

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Reading the Signs Summary Report of Key Findings

Author: Larry O’Connor, May 2014

Contact details: Correspondence: Larry O’Connor PO Box 299 Merbein, VIC 3505 Suggested citation: O’Connor, L.F. 2014, Reading the Signs –Summary Report of Key Findings, Merbein, Victoria. © Larry O’Connor 2014 All rights reserved.

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Disclaimer

This report has been produced in the interests of clear, open, and informed community

debate about what is a significant issue for the Mildura community. As such, I wish to

formally assert that the following report has been produced in the public interest and at no

point in time have I ever sought to soil the character or good reputation of any persons

connected directly or indirectly by employment or other means of association with the

Mildura Rural City Council or persons or parties involved in the public debate surrounding

the Mildura Rural City Council’s Budget 2013/14 and associated public debate surrounding

the Mildura Rural City Council’s rating strategy, regardless of the stance that any such

persons or parties may have taken in this debate, and regardless of the nature or extent of

involvement that any such persons or parties have had or may have had with the Mildura

Rural City Council or any particular organizations via employment or otherwise –

commercial, non-commercial, public, political or other - connected directly or indirectly to

the Mildura Rural City Council and/or debate in question.

In addition, the views and opinions expressed in this report are entirely those of the author

who has a genuine interest in informed public debate on matters of significance to the

Mildura community and do not reflect, and nor should be taken to reflect, the views and

opinions of La Trobe University nor any of the University’s employees, students, associates,

agents or other stakeholders.

In service to the community of Mildura.

Larry O’Connor

Colossians 3:23-24.

February 2014.

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Caveat – A note on financial modelling

The analysis presented in this report has at times been based financial modelling, the data

for which was sourced from an extensive review of publicly available data. Whilst all due

care has been taken when developing the financial modelling used for the analysis

presented in this report, it must be noted that all financial modelling is based upon

assumptions and relationships that may not hold equally true in all specific instances to

which the modelling may be applied. Like all financial modelling, the findings generated are

only valid to the extent that the assumptions underlying the modelling hold true. In all

cases the author has disclosed any assumptions that have been made so the reader can

form their own assessment about the legitimacy of the modelling presented.

The author is of the view that the modelling contained herein is robust and defendable.

However, the reader is encouraged to examine the report as presented, the validity of the

modelling and data upon which the modelling has been based, with the view to forming

their own conclusions about the validity of the findings as presented in this report.

In the interests of clear, open, consultative and informed community debate about what is a

significant issue for the Mildura community.

Larry O’Connor

February 2014.

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Author’s note in relation to the numbering of sections, tables and figures throughout this report

The reader’s attention is drawn to the numbering system used throughout this report:

Tables and figures have been numbered with three numbers in the format - ’X.X.X’.

For example: Figure 7.4.12.

The three numbers refer to the following:

- The first number (‘7’) refers to the chapter in which the table or figure is located. In the

above example, this would be Chapter 7;

- The second number refers to the Part or Section of the chapter in which the table or

figure is located. In the above example, the ‘4’ refers to Part 4 of Chapter 7;

- The third number refers to the number of the table or figure within each chapter Part or

Section. In the above example, ’7.4.12’ means that the table or figure is the 12th table or

figure in the 4th Part of Chapter 7.

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Reading the Signs – Overview of Report Contents

Chapter Title / Topic

1 Background: An overview of some key issues in the Victorian Local Government sector

2 Overview: Approach to subject matter, Data Sources and Methodology

3 An historical review of the MRCC’s performance in the context of the Victorian Local Government sector (2005-10)

4 Mildura Rural City Council: Long-term Financial Ratio Analysis

5 A review of the Mildura Rural City Council’s financial performance relative to the Regional and Rural City peer group 2007/08-2011/12

6 A review of the Mildura Rural City Council’s financial performance relative to the Similar Size Council peer group 2007/08-2011/12

7 Re-thinking the notion of financial sustainability within the context of the Victorian Local Government Sector

8 An analysis of the MRCC’s debt strategy: Part 1 & Part 2

9 Developing a risk profile for the MRCC

10 28 Issues of Concern: Part 1, Part 2 & Part 3

11 A review of the MRCC’s rating strategy with recommendations going forward: Part 1 & Part 2

12 A sustainable budget strategy for the MRCC

13 Introducing metered parking services across the Mildura CBD and 15th Street retail precinct: An evaluation

14 Summary of key findings and recommendations by individual chapter

Appendices

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Chapter 14 – Summary of key findings and

recommendations by individual chapter

ABSTRACT

The purpose of this chapter is to present a chapter-by-chapter summary of the key

findings and recommendations reported in Chapters 3 – 13 of the Reading the Signs

report.

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Table of Contents

Chapter 14 – Summary of key findings and recommendations by individual chapter ....................... 13

Summary of key findings – Chapters 3-6 Combined ..................................................................... 17

A summary of the MRCC’s actual and projected financial performance (2007/08-2016/17) - 10 key

facts and 32 key graphs ............................................................................................................... 19

10 key facts.............................................................................................................................. 19

MRCC - 32 key graphs .............................................................................................................. 25

Specific findings – Chapter 3: Comparative Performance Evaluation of MRCC and Regional and

Rural Cities peer group (2005-10) ................................................................................................ 59

Specific findings – Chapter 5: Comparative performance evaluation – MRCC v Regional and Rural

City peer group (2007/08-2011/12) ............................................................................................. 67

Specific findings – Chapter 6: Comparative performance evaluation – MRCC v Similar Size Councils

peer group (2007/08-2011/12) .................................................................................................... 83

Summary of key findings – Chapter 7 – Re-thinking the notion of financial sustainability in the

Victorian Local Government Sector ............................................................................................ 101

Summary of key findings – Chapter 8: A review of the MRCC’s debt strategy with accompanying

recommendations ..................................................................................................................... 113

Key recommendations in relation to the MRCC’s debt strategy .................................................. 141

Summary of key findings – Chapter 9: Developing a risk profile for the MRCC’s 2013/14 budget

projections ................................................................................................................................ 145

Summary of key findings – Chapter 10: 28 Issues of Concern ..................................................... 157

Summary of key findings – Chapter 11: A review of the MRCC’s rating strategy with

recommendations going forward ............................................................................................... 175

20 Recommendations in relation to the MRCC’s rating strategy ................................................. 193

Summary of key findings – Chapter 12: Developing a long-term sustainable budget strategy for the

MRCC ........................................................................................................................................ 203

Proposed Sustainable Budget Strategy: Preferred Option ($’000)........................................... 209

Proposed Sustainable Budget Strategy: ‘Fall-back’ Option ($’000) .......................................... 213

Key comparative graphs: MRCC Budget 2013/14 versus Proposed Sustainable Budget Strategy .... 217

14 Key (non-negotiable) Budget Principles for the MRCC ........................................................... 239

Summary of key findings – Chapter 13: An evaluation of metered parking as a non-rate revenue

source ....................................................................................................................................... 241

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Summary of key findings – Chapters 3-6 Combined

A summary of the key findings from Chapters 3 – 6 is presented in the following pages…

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A summary of the MRCC’s actual and projected financial performance (2007/08-2016/17) - 10 key facts and 32 key graphs

10 key facts A review of the MRCC’s actual and projected financial performance over the 2007/08-2016/17 period resulted in the following 10 key observations:

Indicator Explanation Reference

1. Geographic & Socio-economic

- Geography – The MRCC’s municipality is the largest within the State of Victoria at 22 087 square kilometres – 7.67 times the average municipality size of 2 881 square kilometres;

- Population – The resident population of the MRCC municipality is 53 877 – 21.8 % less than the average for Victorian municipalities (64 900);

- CIV Base - The MRCC’s municipality-wide CIV base is $6 591 million – 38.5 % less than the average of 18 other Regional & Rural Cities and Similar Size Councils (the ‘G18’ group of local Councils) ($10.713 million);

- SEIFA Index of Relative Advantage & Disadvantage – The Mildura community is the 3rd most disadvantaged community in the State of Victoria, and the most disadvantaged community in the G18 group of local Council areas.

Implication: The MRCC faces an underlying cost disadvantage and relatively low CIV-base – both contribute to higher rate levies across the municipality. This is a significant challenge given that the Mildura community is the 3rd most disadvantaged community in Victoria.

Figure 1 Figure 2 Figure 3 Figure 4

2. Earnings quality

- The MRCC’s operating results have been dominated by capital grants and non-monetary (‘book entry’) items and adjustments – although reported results have been compliant with Generally Accepted Accounting Principles (GAAP) within the Local Government sector – the MRCC’s reported operating results are fundamentally unreliable as an indicator of underlying operational performance.

Implication: The MRCC’s reported headline operating results cannot be interpreted as an indicator of underlying operational performance.

Figure 5 Figure 6

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10 key facts (Con’t)


3. Operating performance

- The MRCC’s Underlying Surplus / (Deficit) less Capital Grants has been in a cumulative deficit since 2009/10 – a scenario that is projected to continue through to at least 2016/17.

- The MRCC’s Net Cash Flow from Operations has been deteriorating significantly since 2011/12. - The MRCC’s Net Cash Flow has deteriorated significantly since 2008/09 and there is no significant recover

projected during the budget forecast period.

Implication: The MRCC’s operating performance has been in a consistent decline for much of the 5 years. This has direct ramification for liquidity and debt due insufficient operating surpluses being available to fund on-going operations.

Figure 7 Figure 8 Figure 9

4. Liquidity The MRCC’s liquidity has deteriorated significantly during the post-2009/10 period:

- Current Ratio – has deteriorated significantly during post-2008/09 period from 2.5 to 1.1 during the budget forecast period.

- Holdings of Cash & Cash Equivalents – have deteriorated significantly since 2011/12 and are currently less than one half the sector averages to Regional and Rural City and Similar Size Councils.

- The only reason why the Current Ratio was above 1.0 as at 30 June 2013 was due to the fact that a $4.0 million loan over 10 years was raised on 28 June 2013 to replenish the MRCC’s working capital and the MRCC received an early payment of external grant monies from the Victorian Grants Commission equivalent to $6.05 million (a total of $10.05 million) – this money is designated for the 2013/14 financial year but was included in the end-of-year results for 2012/13.

Implication: The MRCC’s liquidity is bordering on ‘high risk’ based upon the Victorian Auditor General’s current financial sustainability indicators. The MRCC has projected a Net Cash Deficit of $11.7 million for 2013/14 with no substantial Net Cash Flow surpluses for the remainder of the budget forecast period (2013/14-2016/17).

Figure 10 Figure 11

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5. Indebtedness - The MRCC’s indebtedness has increased significantly during the post 2010/11 period and is projected to continue to increase throughout the budget forecast period even through there is projected to be a significant reduction in projected capital expenditures;

- The cost of MRCC’s annual debt servicing payments has increased by approximately 30 % in the last 3 years as annual principal and interest obligations increase in line with the MRCC’s increasing indebtedness;

- As of 30 June 2013 the MRCC was the 3rd most indebted local Council in the G18 peer group with debt equivalent to 43.89 % of Rate Base;

- Significantly, the MRCC’s average debt term is projected to increase to over 20 years during the budget forecast period – more than double the average debt term for the G18 peer group. This is resulting in a significant increase in interest costs that must be carried by the Mildura community.

Implication: The MRCC’s increasing indebtedness is a major problem that must be dealt with. It is symptomatic of a local Council that is living beyond its means.

Figure 12 Figure 13 Figure 14 Figure 15 Figure 16 Figure 17

6. Capital expenditure & Depreciation

- The MRCC’s annual growth in depreciation allocations (0.95 %) is not keeping pace with the annual growth rate in depreciable assets (4.37 %) – this is leading to an under-allocation of depreciation on an annual basis.

- During 2007/08-2011/12 the MRCC’s depreciable assets grew by 21 % but annual depreciation allocations contracted by 4.35 % - the MRCC was the only local Council in the G18 peer group where this was the case – the MRCC is clearly an anomaly in this regard.

- The annual short-fall in depreciation allocations is estimated to be at least $1.475 million per annum, and up to $4.8 million per annum.

Implication: The MRCC’s under-funding of depreciation is resulting in annual operating results being over-stated and is contributing directly to its increasing indebtedness as monies that would otherwise be allocated to the funding of future asset renewal and upgrade expenditures is being used to fund on-going operating activities. The under-allocation of depreciation is essentially resulting in the MRCC ‘living beyond its means.’

Figure 18 Figure 19 Figure 20 Figure 21 Figure 22 Figure 23 Figure 24

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7. External grant funding

- Both annual operating grant funding and capital grant funding are declining as a percentage of Underlying Revenue although in actual dollar terms operating grants are growing at an average annual rate of 1.3 % – see Figure 29;

- The significant decline in capital grant funding in 2014/15 is exacerbated by the fact that the MRCC has been the beneficiary of historically unprecedented levels of capital grant funding during the 2010/11-2013/14 period.

Implication: The MRCC is going to have to develop growth in alternative non-rate revenue streams in order to off-set slow operating grant funding growth and contracting capital grant funding.

Figure 25 Figure 29

8. Operational efficiency

Three key indicators are a cause for concern:

- Underlying Revenue per $1 of employee benefits shows a consistent downward trend for 2007/08-2016/17 from $3.07 to $2.20. This compares unfavourably with the average for the Regional and Rural Cities peer group of $2.82, and an average for Similar Size Councils peer group of $3.23;

- Employee Benefits as a percentage of Total Operating Expenses have demonstrated a consistent upward trend during 2007/08-2016/17 from 36.76 % to 46.75 %;

- Employee Benefits as a percentage of Materials, Contractors and Service Costs have demonstrated a consistent upward trend during 2007/08-2016/17 from 100.53 % to 154.20 %. This compares unfavourably with the Regional and Rural City peer group average of 100.0 % and the Similar Size Council average of 89.47 %.

Implication: The above figures indicate that the MRCC’s Employee Benefits costs are significantly higher than they should be given the size of the MRCC in terms of Underlying Revenue – indicating the presence of over-staffing.

Figure 26 Figure 27 Figure 28

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9. Growth - During the 2007/08-2016/17 period the MRCC’s annual average Underlying Revenue growth rate has been 2.79 %. The MRCC’s annual average Total Operating Expenses growth rate has been 4.15 %. This scenario is fundamentally unsustainable.

- Given contracting revenue streams, the MRCC must either take steps to increase revenue, reduce expenditures, or a combination of the two.

Implication: An average annual growth rate in operating expenses that is greater than the average annual growth rate in Underlying Revenue is unsustainable in the medium to long-term.

Figure 29 Figure 30

10. Composition of revenue & expenses

Two key observations can be made from the changing composition of the MRCC’s revenue streams and expenses during 2007/08-2016/17:

- The MRCC’s Rate Base dependency is increasing significantly as non-rate sources of income contract. Rate Base as a percentage of Underlying Revenue has increased from 47.7 % in 2007/08 to a projected 64.8 % in 2016/17;

- Employee costs becoming increasingly dominant – accounting for a projected 46.75 % of Total Operating Expenses by 2016/17 compared to 36.8 % in 2007/08.

Implication: The MRCC’s increasing Rate Base dependency is going to place increasing pressure on the MRCC to increase rates by at least 5.0 % per annum into the foreseeable future just to maintain some semblance of Underlying Revenue growth. In addition, the MRCC’s stated policy of minimising the use of contract labour and maintain EFT staff levels is a major factor contributing to the MRCC’s Operating Expense growth rate being at 4.15 % per annum, which is 1.36 % greater than the annual average growth rate in Underlying Revenue.

Figure 31 Figure 32

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MRCC - 32 key graphs

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Figure 1 – Victorian Local Government Sector: Local Government Area (LGA) Size (Square Kilometres)

Definition: Size of Victorian Local Government Areas (LGAs) based upon Square Kilometres. Interpretation: The larger the number, the more geographically dispersed an LGA. Local Councils with large, geographically dispersed LGAs face potential cost disadvantages (on a cost per unit of service delivery basis) due to lower concentrations of population and rateable properties. The exact extent to which this may be the case is unknown. Sector Average: 2881. MRCC: 22 087 square kilometres – 7.67 times larger than the Sector average. The MRCC LGA is clearly the largest LGA in Victoria, accounting for over 10 % of the State of Victoria. The geographical dispersion of the municipality will have implications for the MRCC’s underlying cost structure – although the exact extent to which this is the case is unknown.

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Figure 2 – Victorian Local Government Sector: Estimated Resident Population by LGA (June 2010 – ABS)

Definition: Estimated resident population of each local Council’s Local Government Area (LGA). Interpretation: Highlights the relative size of each local Council’s responsibilities using LGA resident population as a proxy for demand for local Council service provision. Councils with lower populations may not be able to exploit economies of scale and therefore there is a greater likelihood that the per unit cost of Council service delivery will be higher. Sector Average: 68 900. MRCC: 53 877 – 21.8 % below the Sector average of 68 900.

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Figure 3 – Victorian Local Government Sector: SEIFA Index of Relative Socio-economic Advantage and Disadvantage (2011)

Definition: Summarizes variables that indicate relative disadvantage. Index ranks areas on a continuum from most disadvantaged to most advantaged. Interpretation: An area with a high score on this index has a relatively high incidence of advantage and a relatively low incidence of disadvantage. Sector Average: 989 MRCC: 924. 6.57 % below Sector average. MRCC Ranking: 3rd lowest in Victoria – 77th of 79. This significance of this is in the Mildura community’s capacity to pay for local Council service delivery. All other things being equal, on the basis of the SEIFA Index of Relative Advantage and Disadvantage, the Mildura community has the 3rd lowest capacity to pay for local Council service delivery in the State of Victoria.

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29

Figure 4 – Total Capital Improved Value (CIV) – ALL Rateable Property Types - by Local Council ($ million)

Definition: Total Capital Improved Value of all property types against which rates are levied. Numbers in $million. Interpretation: Higher total Capital Improved Value’s within an LGA means that lower rates can be levied to raise the necessary rate revenue to fund a local Council’s activities. Local Councils with lower total Capital Improved Value of rateable properties are at a significant disadvantage in terms of capacity to raise revenue and therefore are compelled to levy higher rates accordingly. Average: $10 713 million for G18 peer group. Average is $8 756 if Geelong is removed from analysis. MRCC: $6 591 million – 38.5 % below G18 average. MRCC is 24.7 % below G17 average (that is, G18 peer group less Geelong). Evaluation: MRCC is at a substantial relative disadvantage in terms of capacity to raise revenue via rates due to total Capital Improved Value of rateable properties being significantly below (38.5 %) the average of the 18 local Councils included in the analysis.

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

30

Figure 5 – Non-monetary Items and Capital Grants as a percentage of Headline Surplus / (Deficit)

Definition: [Non-monetary items + Capital Grants] / Headline Surplus / (Deficit) Interpretation: The higher the number, the less reliable Headline Revenue is as an indicator of underlying operational performance. Benchmark: 20.0 % - above which Headline Revenue a poor indicator of underlying operational performance. MRCC – Status (as at 30 June 2013): 112.54 % - Headline Surplus for 2012/13 is a poor indicator of underlying operational performance. MRCC – Trend: Improvement in ratio during 2013/14-2016/17 (projected) – but significantly above benchmark. MRCC v Benchmark: MRCC’s reported Headline Surplus is significantly above benchmark throughout 2007/08-2016/17 period. Significance: MRCC’s reported Headline Surplus / (Deficit) is a poor indicator of underlying operational performance throughout 2007/08-2016/17.

19.23%

46.53% 38.45%

9.64%

64.46%

30.87%

6.65%

14.64% 16.98% 15.86%

10.02% 17.66%

65.61%

114.91%

34.88%

81.66% 91.39% 95.25%

80.80%

70.02%

29.25%

64.19%

104.06%

124.55%

99.35%

112.54%

98.04%

109.89%

97.78%

85.88%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Non-monetaryitems

Capital Grants

Combined Non-monetary items &Capital Grants

Benchmark - 20 %

31

Figure 6 – Comparison of Headline Surplus / (Deficit), Underlying Surplus / (Deficit), and Underlying Surplus / (Deficit) less Capital Grants

Definition: Underlying Surplus / (Deficit) = Headline Surplus / (Deficit) less Non-monetary (‘book entry’) items. Interpretation: Underlying Surplus / (Deficit) less Capital Grants is the preferred measure for underlying operating performance. Benchmark: No prescribed benchmark. MRCC – Status (Projected as at 30 June 2013): Deficit = $(6.593) million. MRCC – Trend: Long-term trend for Underlying Surplus / (Deficit) less Capital Grants has been deteriorating since 2007/08. MRCC v Benchmark: n.a. Significance: MRCC’s underlying operational performance deteriorated significantly during the 2007/08-2012/13 period. Underlying operational performance is projected to be essentially ‘breakeven’ over the budget forecast period. This is a major concern as the MRCC has no room to move in terms of unexpected / unforeseen increases in costs or decreases in revenue. In addition, the MRCC’s capacity to service debt has deteriorated significantly. The MRCC’s Underlying Surplus / Deficit less Capital Grants indicates that the MRCC’s capacity to service increased debt without increasing revenue and/or reducing expenditures has fundamentally evaporated.

$11,367

$15,570

$3,847

$7,250

$22,327

$18,826

$16,705

$3,367 $2,933 $3,172

$9,181 $8,326

$2,368

$6,551 $7,934

$13,014

$15,594

$2,874 $2,435 $2,669

$8,042

$5,576

-$156

-$1,780

$146

-$2,360

$328

-$333 $65

$448

-$5,000

$-

$5,000

$10,000

$15,000

$20,000

$25,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Headline Surplus /Deficit ($'000)

Underlying Surplus /Deficit ($'000)

Underlying Surplus /Deficit less CapitalGrants ($'000)

32

Figure 7 – Underlying Surplus / Deficit less Capital Grants as percentage of Underlying Revenue less Capital Grants

Definition: Underlying Surplus / (Deficit) less Capital Grants / Underlying Revenue less Capital Grants. Interpretation: Underlying Surplus / (Deficit) less Capital Grants is the ‘true’ measure of underlying operational performance. Should be above 0. Benchmark: 0.00. MRCC – Status (as at 30 June 2013): Deficit = -2.63 %. MRCC – Trend: Significant deterioration during 2007/08-2012/13. Projected to breakeven during budget forecast period. MRCC v Benchmark: Below benchmark in 4 of 6 years during 2009/10-2014/15 period. Significance: MRCC’s underlying performance has fundamentally deteriorated during 2007/08-2012/13 period. Projected performance during budget forecast period is breakeven with no room to move in the event of unforseen events / expenditures. In addition, the capacity of the MRCC to service debt has deteriorated significantly at a time when the MRCC’s indebtedness is increasing.

10.06%

6.62%

-0.19%

-2.22%

0.16%

-2.63%

0.38% -0.37%

0.07% 0.45%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Underlying Surplus /(Deficit) as %Underlying Revenue

Benchmark

33

Figure 8 – Net Cash Flow from Operations as percentage of Underlying Revenue

Definition: Net Cash Flow from Operations / Underlying Revenue. Interpretation: The higher the number, the better the performance. Benchmark: RRC Average (2007/08-2011/12) – 27.25 %. SSC Average (2007/08-2011/12) – 27.04 %. MRCC – Status (as at 30 June 2013): 21.94 % - below RRC and SSC peer group averages. MRCC – Trend: Consistent deterioration during 2007/08-2016/17 period. Significant deterioration during budget forecast period. MRCC v Benchmark: Below benchmark in 8 of 10 years during 2007/08-2016/17 period. Significance: MRCC’s Net Cash Flow from Operations has been exhibiting a deteriorating trend throughout the 2007/08-2012/13 period. This is projected to deteriorate further during budget forecast period.

26.70% 26.78% 26.16% 25.27%

34.93%

21.94%

26.73%

21.97% 21.08% 20.79%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

NCF from Operationsas percentageUnderlying Revenue

RRC Average(2007/08-2011/12) -27.25 %

SSC Average (2007/08-2011/12) - 27.04 %

34

Figure 9 – Net Cash Flow as percentage of Underlying Revenue

Definition: Net Cash Flow from Operations / Underlying Revenue. Interpretation: The higher the number, the better the performance. Benchmark: RRC Average (2007/08-2011/12) – 2.60 %. SSC Average (2007/08-2011/12) – 1.45 % %. MRCC – Status (as at 30 June 2013): 4.61 % - above RRC and SSC peer group averages. MRCC – Trend: Consistent deterioration during 2007/08-2016/17 period. Significant deterioration during budget forecast period. MRCC v Benchmark: Below RRC benchmark in 8 of 10 years during 2007/08-2016/17 period. Below SSC benchmark in 7 of 10 years during 2007/08-2016/17 period. Significance: MRCC’s Net Cash Flow from Operations has been exhibiting a deteriorating trend throughout the 2007/08-2012/13 period. Poor Net Cash Flows projected to deteriorate further during budget forecast period.

2.82% 3.91%

1.36%

-4.78%

1.54%

4.61%

-11.44%

0.37% 0.37% 0.37%

-14.00%

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

NCF as percentageUnderlying Revenue

RRC Average(2007/08-2011/12)

SSC Average (2007/08-2011/12)

35

Figure 10 – Current Ratio

Definition: Current Assets divided by Current Liabilities. Interpretation: Prima facie indicator of capacity to meet short-term financial obligations. Benchmark: RRC Average (2007/08-2011/12) – 2.24. SSC Average (2007/08-2011/12) – 2.42. Auditor General’s ‘High Risk’ benchmark – 1.0. MRCC – Status (as at 30 June 2013): 1.73 – Significantly below RRC and SSC peer group averages. NOTE: Current Ratio at 30 June 2013 would be 1.22 if $4.0 loan on 28 June 2013 & bringing forward of $6.05 million in VCG funding from 2013/14 are excluded from the analysis. MRCC – Trend: Consistent and significant deterioration during 2007/08-2016/17 period. During budget forecast period MRCC’s Current Ratio is only marginally above the Auditor General’s ‘High Risk’ benchmark of 1.0. MRCC v Benchmark: Below RRC and SSC benchmarks in 8 of 10 years during 2007/08-2016/17 period. Significance: MRCC’s liquidity has been deteriorating significantly throughout the 2007/08-2012/13 period.

2.43 2.53

1.64 1.76

1.38

1.73

1.07 1.08 1.08 1.10

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Current Ratio

RRC Average(2007/08-2011/12)

SSC Average (2007/08-2011/12)

Auditor General - HighRisk Benchmark

36

Figure 11 – Holdings of Cash and Cash Equivalents as percentage of Rate Base

Definition: Total Cash and Cash Equivalents divided by Rate Base. Interpretation: Prima facie indicator of capacity to meet short-term financial obligations. Benchmark: RRC Average (2007/08-2011/12) – 70.09 %. SSC Average (2007/08-2011/12) – 64.85 %. MRCC – Status (as at 30 June 2013): 54.83 % – Below RRC and SSC peer group averages. MRCC – Status (as at 30 June 2013): If bringing forward of $6.05 million VGC funds from 2013/14 is excluded from the analysis = 42.35 % – Significantly below RRC and SSC peer group averages. MRCC – Trend: Consistent and significant deterioration during 2011/12-2016/17 period. MRCC v Benchmark: Below RRC and SSC benchmarks in 8 of 10 years during 2007/08-2016/17 period. Significance: MRCC’s liquidity has been deteriorating significantly throughout the 2007/08-2012/13 period.

62.35%

66.88%

60.03% 56.77%

72.44%

54.83%

29.41% 28.69% 27.66% 26.68%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Holdings of Cash &Cash Equivalents as %Rate Base

RRC Average(2007/08-2011/12)

SSC Average (2007/08-2011/12)

37

Figure 12 – MRCC: Actual Level of Indebtedness (Total Liabilities & Interest Bearing Debt) (2007/08-2016/17) ($’000)

Actual and projected indebtedness (2007/08-2016/17):

Total Liabilities – The MRCC’s overall level of indebtedness has been consistently increasing since 2010/11. Projected Total Liabilities of $53.011 million in 2016/17 is 51.13 % higher than $35.077 million in 2007/08.

Interest Bearing Debt – The MRCC’s indebtedness as measured by outstanding Interest Bearing Debt has been consistently increasing since 2010/11. Projected Interest Bearing Debt of $26.304 million in 2016/17 is 59.05 % higher than $16.538 million in 2007/08.

$35,077 $36,750 $36,230

$32,797

$50,735

$47,271 $48,061 $48,097 $49,905

$53,011

$16,538 $18,075

$16,715 $15,286

$19,616

$23,133 $23,333 $22,735 $23,884 $26,304

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

TotalLiabilities

InterestBearingDebt

38

Figure 13 – MRCC: Actual & Projected Level of Indebtedness relative to Underlying Revenue less Capital Grants (2007/08-2016/17)

Commentary:

Relative to Underlying Revenue less Capital Grants, the MRCC’s level of indebtedness increased significantly during the 2010-2012/13 period and the data presented in the above graph indicates that the increased level of indebtedness has become the new ‘tolerable’ norm for the MRCC with no evidence of significant reduction throughout the budget forecast period.

43.87% 43.65% 44.70%

40.94%

56.51% 56.60% 55.12%

53.19% 52.70% 53.43%

20.68% 21.47% 20.62% 19.08%

21.85%

27.70% 26.76% 25.14% 25.22%

26.51%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

TotalLiabilities as%UnderlyingRevenueless CapitalGrants

InterestBearingDebt as % ofUnderlyingRevenueless CapitalGrants

39

Figure 14 – MRCC: Impact of Increasing Indebtedness upon actual / projected annual finance costs (2007/08-2016/17)

Commentary:

The significant increase in the MRCC’s interest bearing debt in 2011/12 (from $15.286 million to $19.616 million – an increase of $4.330 million) effectively increased the MRCC’s actual / projected annual finance costs by approximately $450 000 - $500 000. The major reason for the actual / projected annual finance costs remaining at a relatively consistent level during the 2012/13-2016/17 even though interest bearing debt is projected to increase to $26.304 million by 2016/17 during this period is due to the use of longer loan terms as indicated in successive MRCC Budget documents.

$1,084 $1,024 $1,135

$1,047 $970

$1,440 $1,564

$1,452 $1,460 $1,529

$1,574

$963

$1,360 $1,429 $1,270

$1,483 $1,648 $1,598

$1,851

$1,580

$2,658

$1,987

$2,495 $2,476

$2,240

$2,923

$3,212 $3,050

$3,311

$3,109

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

InterestCost

PrincipalRepayments

Total DebtServicingPayments

40

Figure 15 – MRCC: Estimated Weighted Average Debt Portfolio Term (Years) by year (2008/09-2016/17)

Commentary: Based upon both the estimated average debt portfolio term and estimated weighted average debt portfolio term, the MRCC’s estimated debt portfolio term (in years) is trending upwards – that is, the estimated average debt portfolio term is projected to get longer over the budget forecast period.

17.50 17.50 17.50

15.77 15.15

17.09

18.82

20.50 21.50

18.62 18.62 18.62 18.24 17.52 17.25

17.91

19.48 20.51

0.00

5.00

10.00

15.00

20.00

25.00

2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

EstimatedAverage DebtPortfolio Term(Years)

EstimatedWeightedAverage DebtPortfolio Term(Years)

41

Figure 16 – Comparison with other local Councils: Interest Bearing Debt as % Rate Base

Definition: Total Interest Bearing Debt / Rate Base (Rates & Charges) as at 30 June 2013. Interpretation: The higher the number, the more indebted a local Council is relative to its Rate Base. G18 Average: 31.71 %. MRCC: 43.89 % - 38.41 % above G18 average. Evaluation: MRCC’s indebtedness, as measured by total Interest Bearing Debt, is significantly higher than the G18 average. The MRCC is clearly the 3rd most indebted Council within the G18

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

42

Figure 17 – Comparison with other local Councils: Estimated years to repay interest Bearing Debt

Definition: Total Interest Bearing Debt as at 30 June 2013 / Annual Principal Payments made during 2012/13. Interpretation: A higher number indicates that a local Council is going to take a longer time to repay debt based upon 2012/13 principal payments.. G18 Average: 8.88 years. If Shepparton is excluded from the analysis – G17 average is 7.11 years. MRCC: 15.60 years – 75.68 % above G18 average, 119.4 % above G17 average. Evaluation: Based upon principal payments made during 2012/13, the MRCC is going to take significantly longer to repay its existing debt relative to the G18 average. In essence this means that the MRCC is incurring significantly greater interest costs on its debt relative to the G18 peer group.

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

43

Figure 18 – Depreciation Allowance versus Depreciable Assets (Infrastructure, Property, Plant & Equipment)

Definition: Depreciable Assets (rounded to nearest $10 000) versus Depreciation Allowance (rounded to nearest $1000). Interpretation: Generally, Depreciation Allowance should move in the same direction and by similar proportionate amounts as the movement in the total book value of Depreciable Assets. Benchmark: No prescribed benchmark. MRCC – Status (Projected as at 30 June 2013): Marginal increase in Depreciation Allowance. MRCC – Trend: Absolute growth in Depreciable Assets over 2007/08-2016/17 period = 39.33 %. Absolute growth in annual Depreciation Allowance over 2007/08-2016/17 period = 8.59 %. Average annual growth rate comparison: Depreciable Assets – 4.37 %; Annual Depreciation Allowance – 0.95 %. Significance: The data suggests that Depreciation Allowance is being managed due to significant increases in depreciable assets not being matched with similar proportionate increases in Depreciation Allowance – which has significant implications for reported operating results which have fundamentally been understated during the post-2009/10 period. In addition, annual Depreciation Allowance allocations will inevitably be insufficient to cover asset renewal and upgrade expenditures going forward.

46107 45462 48472 47399

55930 60147 61495 62272 63180 64239

14975 15098 14710 15150 14323 15608 15050 15644 15950 16262

0

10000

20000

30000

40000

50000

60000

70000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Depreciable Assets(IPPE) ($'0000)

DepreciationAllowance ('000)

44

Figure 19 – Average Depreciation Rate applied to Depreciable Assets (2007/08-2016/17)

Definition: Total Depreciation Allowance divided by Total Depreciable Assets (Infrastructure, Property, Plant & Equipment). Interpretation: Generally, Depreciation Allowance should move in the same direction and by similar proportionate amounts as the movement in the total book value of Depreciable Assets. Benchmark: No prescribed benchmark. MRCC – Status (as at 30 June 2013): 2.59 % - significantly lower than the average depreciation rate applied during 2007/08-2010/11. MRCC – Trend: Average Depreciation Rate being applied to depreciable assets has been consistently declining during post-2008/09. Of particular concern is the clear reduction in the average depreciation rate in 2009/10, 2011/12, and 2013/14 (projected). MRCC v Benchmark: n.a. Significance: The data suggests that Depreciation Allowance is being managed due to significant increases in depreciable assets not being matched with similar proportionate increases in Depreciation Allowance – which has significant implications for reported operating results which have fundamentally been understated during the post-2009/10 period.

3.25% 3.32% 3.06%

3.19%

2.56% 2.59% 2.45% 2.51% 2.52% 2.53%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Average DepreciationRate

45

Figure 20 – Annual Depreciation Short-fall (2007/08-2016/17)

Definition: Total Depreciation Allowance less [Expenditure on Depreciable Assets (Infrastructure, Property, Plant & Equipment) + Capital Grants]. Interpretation: Any shortfall in Depreciation Allowance must be covered by existing cash reserves or new borrowings. Benchmark: No prescribed benchmark. MRCC – Status (as at 30 June 2013): Depreciation shortfall - $1.443 million. Moving average (2007/08-2012/13) - $1.475 million per annum. MRCC – Trend: With the exception of 2010/11 and 2014/15 (projected), there has been / is projected to be a consistent and significant annual depreciation shortfall throughout 2007/08-2016/17. Of particular concern is the clear ‘spikes’ in the depreciation short-fall in 2009/10, 2011/12, and 2013/14 (projected) – three years in which there were also significant reductions in depreciation allocations (see Figure 4.5.3). MRCC v Benchmark: n.a. Significance: As noted, the under-allocation of Depreciation Allowance effectively means that monies that would ordinarily be set aside for funding future capital works programs are made available and used for funding on-going operating activities. This amounts to an effective de-funding of capital investment programs in order to fund annual operating activities.

$3,487

$1,968

$5,116

-$2,351

$7,404

$1,443

$8,240

$23

$2,190

$3,868 $3,487

$2,728 $2,361

$691 $1,011

$1,475 $1,383 $1,033

$246 $606

-$4,000

-$2,000

$-

$2,000

$4,000

$6,000

$8,000

$10,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

AnnualDepreciationShortfall

Movingaverage

46

Figure 21 – Cumulative Depreciation Short-fall, increasing debt & running down of cash reserves (2007/08-2016/17) ($’000)

Definition: Cumulative Depreciation Short-fall, cumulative Interest Bearing Debt, and year-end holdings of Cash & Cash Equivalents. Interpretation: Any depreciation short-fall must be funded via debt and/or existing cash reserves. Benchmark: No prescribed benchmark. Note: Balance of Cash & Cash Equivalents at 30 June 2013 would be $22.848 if $6.05 million in VGC funding brought forward from 2013/14 is excluded from the analysis. MRCC – Trend: Average Depreciation Rate being applied to depreciable assets has been consistently declining during post-2008/09. Of particular concern is the clear reduction in the average depreciation rate in 2009/10, 2011/12, and 2013/14 (projected). MRCC v Benchmark: n.a. Significance: An inadequate Depreciation Allowance has significant implications for reported operating results which have fundamentally been understated during the post-2009/10 period. Correlation between cumulative Depreciation shortfall and increase indebtedness = 0.9267. R2 value = 0.8587.

$3,487 $5,455

$10,571 $8,220

$15,624 $17,067

$25,307 $25,330 $27,520

$31,388

$24,141

$27,530 $25,923 $25,691

$35,304

$28,898

$16,436 $16,788 $17,151 $17,530

$16,538 $18,075

$16,715 $15,286

$19,616

$23,133

$23,333 $22,735 $23,884 $26,304

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

CumulativeDepreciationShortfall

Holdings ofCash & CashEquivalents

InterestBearing Debt

47

Figure 22 – Growth: Capital Assets (Infrastructure, Property, Plant & Equipment – IPPE)

Note: Data for La Trobe for 2007/08 not available. Definition of Measure: [Capital Assets (IPPE) (2011/12) / Capital Assets (IPPE) (2007/08)] - 1. Interpretation of Measure: Indicates the absolute Capital Assets (IPPE) growth over the period 2007/08 – 2011/12. An average annual growth rate can be calculated by dividing the absolute growth over the 2007/08 – 2011/12 period by 5. G18 Peer group Average: Average absolute Capital Assets (IPPE) growth over 2007/08 – 2011/12 period – 28.90 %. MRCC Performance: 13th of 17 in terms of average absolute growth in Capital Assets (IPPE) over 2007/08 – 2011/12 period – 21.31 %.

38.12%

23.58%

30.87%

51.64%

61.18%

21.31%

41.09%

31.27% 34.06%

37.77%

15.93%

1.94%

37.98%

16.21% 14.19%

22.87%

11.37%

28.90%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

48

Figure 23 – Growth: Depreciation Expense (Infrastructure, Property, Plant & Equipment – IPPE)

Note: Data for La Trobe for 2007/08 not available. Definition of Measure: [Depreciation - IPPE (2011/12) / Depreciation - IPPE (2007/08)] - 1. Interpretation of Measure: Indicates the absolute Depreciation - IPPE growth over the period 2007/08 – 2011/12. An average annual growth rate can be calculated by dividing the absolute growth over the 2007/08 – 2011/12 period by 5. G18 Peer group Average: Average absolute Depreciation - IPPE growth over 2007/08 – 2011/12 period – 23.85 %. MRCC Performance: Average absolute growth in Depreciation - IPPE over 2007/08 – 2011/12 period – -4.35 %. MRCC Ranking: MRCC is the ONLY Council in the G18 peer group to record negative absolute growth in Depreciation - IPPE during 2007/08-2011/12 period. This is a major concern given that the MRCC’s Capital Assets (IPPE) grew in absolute terms by 21.31 % during the same period – see Figure 22. This suggests that the MRCC’s Depreciation – IPPE provisions have been fundamentally under-stated / inadequate during the 2007/08-2011/12 period.

18.03%

43.16%

21.27%

12.72%

32.43%

-4.35%

28.64%

21.02% 26.07%

23.62%

57.56%

14.60%

21.59% 21.45%

30.18%

9.67%

27.87% 23.85%

-15.00%

-5.00%

5.00%

15.00%

25.00%

35.00%

45.00%

55.00%

65.00%

49

Figure 24 – MRCC: Asset Renewal & Upgrade Expenditures versus Annual Depreciation Allocations (2007/08-2016/17): Actual $

Note: No data available for 2007/08 in relation to split between Asset Renewal, Upgrade and/or Expansion. Key trends:

Average expenditure on asset renewal and upgrade (2008/09-2016/17) - $20.167 million per annum.

Average depreciation allocation (2008/09-2016/17) - $15.345 million per annum.

Average shortfall in depreciation allocation (2008/09-2016/17) = $20.167 - $15.345 = $4.822 million per annum.

The data presented in the above graph clearly highlights that the MRCC’s depreciation allocations have not been sufficient to meet on-going asset renewal and upgrade expenditure needs.

It is acknowledged that approximately $12.1 million was spent on upgrading drainage as a result of the February 2011 ‘flood event’ – but this expenditure was essentially ‘catch-up’ expenditure for drainage works that should have been done previously. Even if this additional $12.1 million expenditure is removed from the analysis, the average annual asset renewal and upgrade expenditure would be $18.822 million, resulting in an annual average shortfall in depreciation allocations of: $18.822 - $15.345 = $3.477 million per annum.

$14,975 $15,098 $14,710 $15,150 $14,323 $15,915 $15,050 $15,644 $15,950 $16,262

$17,996

$15,571

$18,959

$29,822

$25,548 $24,216

$15,099 $16,408

$17,881

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

AnnualDepreciationAllocation

Asset Renewal& Upgrade

50

Figure 25 – External Grant Funding as % of Underlying Revenue

Definition: Operating Grants / Capital Grants / Total External Grants (as the case may be) divided by Underlying Revenue. Interpretation: Prima facie indicator of access to / dependence upon external grant funding (State and/or Federal). Benchmark: No prescribed benchmark. MRCC – Status (as at 30 June 2013): Total grants – 34.77 %. MRCC – Trend: Operating grants have been in consistent decline since 2008/09. Total grant funding in significant decline throughout budget forecast period largely due to a significant decline in projected Capital Grant funding throughout the budget forecast period. MRCC v Benchmark: n.a.. Significance: Decline in external grant funding is significant as it represents a significant source of revenue for the MRCC. Significant decline in capital grants during budget forecast period is significant due to loss of income, but also the capacity of the MRCC to ‘cost shift’ into capital grants is being reduced significantly.

25.07% 26.38%

23.04%

22.78%

25.29%

20.13%

12.94% 21.08%

20.78% 20.32%

1.40%

3.16% 3.02%

9.42% 7.98%

14.65% 14.90%

3.43% 2.44% 2.19%

26.47%

29.55%

26.06%

32.20% 33.27%

34.77%

27.84%

24.50% 23.22% 22.51%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Operating GrantFunding

Capital Grant Funding

Total External GrantFunding

51

Figure 26 – Underlying Revenue per $1 of Employee Benefits

Definition: Underlying Revenue divided by Employee Benefits. Interpretation: Prima facie indicator of operational efficiency based upon total employee costs. A higher number indicates a greater degree of operational efficiency. Benchmark: RRC (2007/08-2011/12) – $2.82; SSC (2007/08-2011/12) – $3.23. MRCC – Status (as at 30 June 2013): $2.79. MRCC – Trend: Consistent declining trend throughout 2007/08-2016/17 actual and projected period. ‘Spike’ in 2012/13 and to a lesser extent 2013/14 can be explained by significant capital grant funding in these two years – which is included in Underlying Revenue. MRCC v Benchmark: Significantly below RRC and SSC averages throughout post-2009/10 period. Significance: Clear evidence that the MRCC’s operational efficiency has been deteriorating.

$3.07 $2.99

$2.65 $2.53

$2.22

$2.79 $2.61

$2.26 $2.22 $2.20

$2.82 $2.82 $2.82 $2.82 $2.82 $2.82 $2.82 $2.82 $2.82 $2.82

$3.23 $3.23 $3.23 $3.23 $3.23 $3.23 $3.23 $3.23 $3.23 $3.23

$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

MRCC

RRC (2007/08-2011/12)

SSC (2007/08-2011/12)

52

Figure 27 – Employee Benefits as percentage of Total Operating Expenses

Definition: Employee Benefits divided by Total Operating Expenses. Interpretation: Prima facie indicator of operational efficiency based upon Employee Expenses using Total Operating Expenses as a proxy for the size / scope of a local Council’s on-ground activities. A higher number indicates poorer relative operational efficiency based upon employee costs. Benchmark: RRC (2007/08-2011/12) – 38.07 %; SSC (2007/08-2011/12) – 34.60 %. MRCC – Status (as at 30 June 2013): 40.87 %. MRCC – Trend: Consistently deteriorating trend throughout 2007/08-2016/17 period. MRCC v Benchmark: Significantly higher than RRC and SSC averages throughout post-2009/10 period. Significance: Results clearly show that the MRCC’s employee costs as a percentage of total operating expenses are clearly higher than the RRC peer group and SSC peer group of local Councils. All other things being equal, employee costs at MRCC are comparatively high relative to the RRC peer group and SSC peer group of local Councils.

36.76% 36.99% 38.81%

42.74%

49.12%

40.87%

45.26% 45.71% 46.25% 46.75%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

MRCC

RRC Average

SSC Average

53

Figure 28 – Employee Benefits as % of Materials, Contractors and Service Costs

Definition: Employee Benefits divided by total Materials, Contractors, and Service Costs. Interpretation: Prima facie indicator of operational efficiency using Materials, Contractors, and Service Costs as a proxy for the size / scope of a local Council’s on-ground activities. A higher number indicates lower relative operational efficiency. Benchmark: RRC (2007/08-2011/12) – 100.0 %; SSC (2007/08-2011/12) – 89.47 %. MRCC – Status (as at 30 June 2013): 104.43 %. MRCC – Trend: Consistent and significant declining trend during post-2009/10 period. During budget forecast period, MRCC’s employee costs are consistently more than 50 % higher than the RRC and SSC peer group averages relative to on-ground service delivery. MRCC v Benchmark: Significantly higher than RRC and SSC peer group averages throughout post-2009/10 period. Significance: Clear evidence that the MRCC’s employee costs are significantly higher than RRC and SSC local Councils relative to on-ground service delivery. This is a prima facie indicator that the MRCC is over-staffed and/or wage/salary levels are too high. Given that the majority of positions at the MRCC are covered by an Industrial Award, over-staffing is the more likely cause.

100.53% 96.34% 98.55%

118.71%

151.72%

104.43%

147.71% 149.84% 152.01% 154.20%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

MRCC

RRC Average

SSC Average

54

Figure 29 – Relative growth in MRCC’s Total Revenue components (2007/08-2016/17)

Clear trends in the MRCC’s Underlying Revenue component growth:

Rate Base – Average annual growth rate (2007/08-2016/17 ) – 6.1 %;

Statutory fees, fines and Charges – Average annual growth rate (2007/08-2016/17 ) - -3.4 %;

Operating grants - Average annual growth rate (2007/08-2016/17 ) – 1.3 %;

Capital Grants – Average annual growth rate (2007/08-2016/17 ) – 4.1 %;

Other Charges – Consistent downward trend from 10.9 % in 2007/08 to a projected 5.4 % by 2016/17. Implication for MRCC: There is a need to look seriously at potential options for increasing non-rate sources of revenue, particularly given the MRCC’s underlying Achilles Heel in the form of a very low Total CIV base.

$38,715 $41,154

$43,184 $45,258

$48,734 $52,203

$55,877 $58,524

$62,009

$65,703

$8,827 $8,295 $8,463 $6,673

$8,775 $5,475 $4,834 $5,027 $5,228 $5,437

$20,327 $22,936

$19,225 $20,149

$24,672

$17,423 $19,310 $19,735 $20,169 $20,613

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Rate Base

Statutory fees,fines & user fees

CashContributions

Operating Grants

Capital Grants

Reimbursements& Subsidies

Other Income

55

Figure 30 – Growth: Underlying Revenue, Total Operating Expenses, Consumer Price Index (CPI)

Definition: Underlying Revenue and Total Operating Expenses for 2007/08-2016/17 (actual and projected). Note: CPI figures multiplied by 100 so as to allow for super-imposing on same axis. Relative growth in CPI unchanged. Interpretation: A closing of the gap between Underlying Revenue and Total Operating Expenses indicates that Total Operating Expenses are growing at a rate greater than Underlying Revenue. Benchmark: Consumer Price Index (CPI) – Average annual growth 2007/08-2016/17 actual and projected = 2.6 %. MRCC – Status (as at 30 June 2013): n.a. – focus is upon long-term trend. MRCC – Trend: Over 2007/08-2016/17 actual and projected period, Total Operating Expenses have been growing at an average annual rate of 4.15 % per annum compared to growth in Underlying Revenue at 2.79 % per annum. Hence the closing of the gap between the two throughout the budget forecast period. MRCC v Benchmark: Both Underlying Revenue and Total Operating Expenses have been growing at a rate greater than CPI. Significance: Growth rate in Total Operating Expenses exceeding growth rate in Underlying Revenue is an unsustainable scenario in the medium to long-term.

81091 86934

83568 88443

97566 104970 102464

93626 97070

101431

71910 78608 81200 81892

89632 91956 86870

90752 94635

98762

0

20000

40000

60000

80000

100000

120000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Underlying Revenue

Total OperatingExpenses

Consumer Price Index(CPI) (relative growthrate)

56

Figure 31 – Changing composition of MRCC’s Underlying Revenue (2007/08-2016/17)

Clear trends in the MRCC’s Underlying Revenue composition:

Rates - Rates have increased from 47.7 % of Underlying Revenue in 2007/08, to 50.9 % in 2012/13, and are projected to increase to 64.8 % of Underlying Revenue by 2016/17. The MRCC is becoming significantly more dependent upon its underlying Rate Base as a major source of revenue;

Operating Grants – Consistent downward trend from 25.1 % in 2007/08 to a projected 20.3 % by 2016/17;

Other Charges – Consistent downward trend from 10.9 % in 2007/08 to a projected 5.4 % by 2016/17. Implication for MRCC: There is a need to look seriously at potential options for increasing non-rate sources of revenue, particularly given the MRCC’s underlying Achilles Heel in the form of a very low Total CIV base.

47.7% 47.3%

51.7% 51.2% 49.9% 50.9%

54.5%

62.5% 63.9% 64.8%

10.9% 9.5% 10.1% 7.5%

9.0%

5.3% 4.7% 5.4% 5.4% 5.4%

25.1% 26.4% 23.0% 22.8%

25.3%

17.0% 18.8%

21.1% 20.8% 20.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Rates

Other Charges

CashContributions

Operating Grants

Capital Grants

Reimbursements& Subsidies

Other Income

57

Figure 32 – Composition: Total Operating Expenses

Definition: Actual and projected costs by category divided by Total Operating Expenses. Interpretation: Provides insight into the composition of the MRCC’s costs and how this composition may be changing over time. Contributes to providing a basis for informed cost management strategies. Benchmark: No prescribed benchmark. MRCC – Trend: Key trends:

- Employee Benefits are accounting for an increasingly larger proportion of total operating costs; - Contractors, Materials & Services are accounting for a progressively smaller proportion of total operating costs; - Depreciation & Amortization costs are accounting for a progressively smaller proportion of total operating costs.

MRCC v Benchmark: n.a. Significance: The above two trends are a concern as it indicates that the MRCC’s employee costs are increasing relative to other areas of expenditure at the same time as translation of expenditures into ‘on-ground’ service delivery is declining.

36.80%

37.00%

38.80% 42.70%

49.10%

40.90%

45.30% 45.70% 46.20% 46.70%

36.60%

41.30%

39.40% 36.00%

32.40%

39.13%

34.20% 34.10% 34.00% 33.90%

20.80% 19.20% 18.10% 18.50%

16.00% 16.97% 17.30% 17.20% 16.90% 16.50%

5.80% 2.50% 3.70% 2.80% 2.50% 3.20% 3.20% 3.00% 2.90% 2.90%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Employee Benefits

Contractors,Materials & Services

Depreciation &Amortization

Finance & Other

59

Specific findings – Chapter 3: Comparative Performance Evaluation of MRCC

and Regional and Rural Cities peer group (2005-10)

61

Table 1 – Summary: Evaluating the MRCC within context of 79 councils making up the Victorian Local Government sector

Measure

Mildura Rural City Council

(MRCC)

Victorian Local Government

Sector - Average

Victorian Regional and Rural Cities

(RRC) - Average

Similar Sized

Councils (SSC) - Average

Evaluation

1. Size of Local Government Area (LGA) (Square Kilometres)

22 087 2 881 4 166 6 869 MRCC LGA clearly the largest in Victoria – representing over 10 % of entire State.

MRCC may be at a relative cost disadvantage due to geographic dispersion of LGA population

and rateable properties

2. Population 53 877

68 900

67 657

49 340

MRCC LGA population 21.8 % below Sector average.

Population growth rate in MRCC LGA during 2005-10 below Sector, RRC & SSC averages – this is a major concern in-so-far as future economic

growth within the MRCC LGA is concerned. Lower population growth within MRCC LGA may be symptomatic of underlying economic fragility

of region.

3. Population growth rate ( 2005-10)

5.63 % 6.40 % 6.22 % 7.54 %

4. Number of rateable properties

27 287

32 747

32 803

24 823

MRCC 49.38 % below Sector average. MRCC grew at a rate slower than Sector and SCC

during 2005-10.

Note: Combined effect of large LGA, below average population and number of rateable properties is likely to result in an increase in

average cost per unit of service delivery relative to other local Councils, all other things being

equal.

5. Growth in number of rateable properties (2005-10)

4.52 % 8.93 % 8.44 % 12.07 %

62

Table 1 – Summary: Evaluating the MRCC within context of 79 councils making up the Victorian Local Government sector (Con’t)

Measure


(MRCC)


Sector - Average


(RRC) - Average

Similar Sized


Evaluation

6. SEIFA Index of Relative Socio-economic Advantage and Disadvantage

924 3rd lowest in

State

989 956 982

Poor SEIFA index numbers for MRCC LGA is a major concern. The MRCC LGA community is

clearly one of the most disadvantaged communities in Victoria.

7. SEIFA Index of Relative Socio-economic Disadvantage

935 5th lowest in

State

997 970 993

8. SEIFA Index of Economic Resources

941 5th lowest in

State

993 965 1002

9. SEIFA Index of Education and Occupation

930 6th lowest in

State

998 956 970

10. Rates and charges per assessment as of 2010, and growth for 2005-10 period

$1574 34.24 %

$1326 34.24 %

$1450 36.83 %

$1435 35.58 %

MRCC significantly higher than Sector, RRC and SSC averages.

Growth in Rates and Charges per Assessment on par with Sector during 2005-10 period.

63


Measure


(MRCC)


Sector - Average


(RRC) - Average

Similar Sized


Evaluation

11. Residential rates and charges per assessment as at 2010, and growth for 2005-10 period

$1294 24.83 %

$1119 35.52 %

$1181 34.61 %

$1435 35.84 %

MRCC significantly higher than Sector average, but below SSC average.

Growth in Residential Rates and Charges during 2005-10 among lowest in Sector.

12. Operating expenditures per assessment as of 2010, and growth for 2005-10 period

$2976 32.08 %

$2527 19.47 %

$2858 17.71 %

$2680 20.21 %

Significantly higher than Sector and SCC average. Growth in operating expenditures per

assessment during 2005-10 significantly above Sector, RRC and SSC averages. This is a major

concern.

13. Revenue (Rates & Charges) less Expense growth differential (2005-10)

2.16 % 14.77 % 19.12 % 15.37 % MRCC’s performance significantly worse than Sector, RRC and SSC averages. A major concern

– MRCC unable to contain costs in line with Sector and peer group (RRC & SSC) averages.

14. Operating expenditure per assessment – Rates & Charges per assessment multiple (2010)

1.89

1.89

1.97

1.88

MRCC on par with Sector and SCC average. Marginally below RRC average.

64


Measure


(MRCC)


Sector - Average


(RRC) - Average

Similar Sized


Evaluation

15. Capital expenditure per assessment as of 2010, and growth for 2005-10 period

$819 73.86 %

$717 69.66 %

$838 73.13 %

$822 96.97 %

MRCC on par with Sector averages with a consistently upward trend. Due to volatile

nature of capital expenditure decisions from year to year, no significant insights provided.

16. Infrastructure renewal percentage as of 2010, and trend for 2005-10 period

94 % Improving

trend

75 %

82 % Improving

trend

68 % Consistent, improving

trend

MRCC consistently above sector / peer group averages.

17. Infrastructure renewal and maintenance percentage as of 2010, and trend for 2005-10 period

96 % Inconsistent

trend

85 % 88 % Improving

trend

78 % Deteriorating

trend

MRCC consistently above sector / peer group averages.

65


Measure


(MRCC)


Sector - Average


(RRC) - Average

Similar Sized


Evaluation

18. Liabilities per assessment as of 2010, and growth for 2005-10 period

$1328 25.45 %

$869 27.46 %

$1192 28.41 %

$1228 25.94 %

MRCC debt is significantly higher than Sector and RRC averages. Although growth in liabilities per assessment significantly lower than Sector, RRC and SSC averages, MRCC commencing from

a high base.

19. Liabilities per assessment as percentage of rates & charges per assessment (2010)

84.35 % 65.50 % 89.88 % 92.64 % MRCC significantly more indebted than Sector average, although below RRC and SSC averages.

20. Operating results per assessment as of 2010, and trend for 2005-10 period

$141 000 Improving trend

$458 000 $282 000 Deteriorating

trend

$348 000 Consistent (no clear upward or downward

trend)

MRCC below Sector average but above RRC and SSC averages during 2005-09.

Note: Operating results can vary significantly from year-to-year.

67

Specific findings – Chapter 5: Comparative performance evaluation – MRCC v

Regional and Rural City peer group (2007/08-2011/12)

68

Table 1 - Summary: MRCC’s Socio-Economic Context Measure MRCC – 2011/12 MRCC - Trend Peer Group Peer Group - Trend Assessment

1. SOCIO-ECONOMIC INDICATORS

a. Population 50 997

53 8771

Population has declined by 1.6 % during 2006-2011

period

65 723 Population has grown by 2.12 %.

MRCC LGA population 22.4 % below RRC LGA average.

Stagnant population growth a real concern.

b. LGA size 22 087 square kilometres

Largest LGA in Victoria

n.a. 4 144 square kilometres

n.a. MRCC LGA largest in Victoria, 5.33 times larger than RRC

average LGA size.

c. Number of Rateable Properties

27 813

n.a. 33 390 n.a. MRCC 16.7 % below RRC average.

d. Geographical dispersion of Rateable Properties (RPs)

1.26 RPs per square kilometre

n.a. 34.46 RPs per square kilometre

n.a. MRCC LGA the most geographically dispersed of

the 11 RRCs.

e. SIEFA Index of Relative Advantage / Disadvantage

924 – 77 of 79 in Victoria (3rd lowest)

Ranking has fallen from 68 of 79 in

2006 (11th lowest)

RRC Average - 956 n.a. MRCC LGA community the most disadvantaged of the 11

RRC communities.

f. SIEFA Index of Relative Disadvantage

935 – 75 of 79 in Victoria (5th lowest)

n.a. RRC Average - 970 n.a. MRCC LGA community the most disadvantaged of the 11

RRC communities.

g. SIEFA Index of Economic Resources


n.a. RRC Average - 965 n.a. MRCC LGA community the most disadvantaged of the 11

RRC communities.

h. SEIFA Index of Education and Occupation


n.a. RRC Average - 956 n.a. MRCC LGA community the 2nd most disadvantaged of the 11

RRC communities.

1 Note: Population figures based upon official ABS Census data. The author acknowledges that differences do exist in ‘official’ records in relation to population figures. Department of Planning and Community Development (Victoria) cite population of Mildura Rural City LGA as 53877 as of June 2009.

69

Table 1 - Summary: MRCC’s Socio-Economic Context (Con’t) Measure MRCC – 2011/12 MRCC - Trend Peer Group Peer Group - Trend Assessment


i. Rates & Charges per person

$955.62 – 2nd most expensive of 11 RRCs

n.a. RRC average - $842.01

n.a. MRCC 13.49 % higher than RRC average.

j. Rates & Charges per person adjusted for SEIFA Index of Advantage and Disadvantage

$1013.54 n.a. RRC average - $862.90


k. Rates & Charges per Rateable Properties

$1752.20 – 4th most expensive of 11 RRCs

n.a. RRC average - $1631.30


l. Rates & Charges per Rateable Property adjusted for SEIFA Index of Advantage and Disadvantage

$1858.39 n.a. $1671.78 n.a. MRCC 11.16 % higher than RRC average.

m. Regional Competitive Index (Regional Australia Institute 2013)

1 = Least Competitive

11th of 11 RRCs in Victoria

n.a. Average = 2.64 n.a. MRCC LGA rated as among the least competitive in Australia.

11th of 11 in Victorian RRC peer group.

Summary: Lower population and lower absolute number of rateable properties, combined with significantly larger geographic dispersion of LGA put MRCC at a relative cost disadvantage compared to other RRCs. In essence, this means that the cost per unit of service delivery can be expected to be higher with the MRCC relative to other local Councils which have larger resident populations and more rateable properties within a geographically smaller LGA. The exact size of this relative cost disadvantage is unknown but must be considered in any comparative analysis of the MRCC with other local Councils. Significantly, the MRCC LGA community is one of the most disadvantaged communities in Victoria based upon a range of different SEIFA measures, including income, access to non-income economic resources, education, and skills-base. The MRCC LGA community is the most disadvantaged community within the RRC peer group based upon 3 of 4 SIEFA indexes included in the analysis (Index of Relative Socio-economic Advantage and Disadvantage, Index of Relative Socio-economic Disadvantage, Index of Economic Resources), and 2nd most disadvantaged in relation to the 4th SIEFA index included in the analysis (Index of Education and Occupation (low skills / education base), but also among the most expensive in terms of rates and charges on both a per person and per rateable property basis. Finally, according to the Regional Australia Institute, the MRCC LGA is among the least competitive in Australia, and ranks 11th out of 11 Regional and Rural Cities in Victoria, the only Council within the RRC peer group that is rated in the ‘least competitive’ category.

70

Table 2 - Summary: MRCC’s Earnings Quality 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment

2. EARNINGS QUALITY – the degree to which reported (‘Headline’) operating results are indicative of underlying operational performance

a. Reported (Headline) Operating Results

Above RRC average in 3 of 5 years –

between $3.847 - $22.327 million

No clear trend due to inconsistencies

between years.

Average between $9.165 - $13.050

million

Clear, though moderate upward trend.

MRCC ranked 5th of 11 RRCs. 2011/12 result of $22.327

million best result within RRC peer group

b. Headline Operating Results [ Headline Surplus / (Deficit) as percentage of Headline Revenue]

Above RRC average in 3 of 5 years,

averaging 12.56 % across the 5 years

Evidence of improving trend in reported Headline

Results. Range: 4.52-19.94 %

Range: 9.79-12.10 %,


Slightly improving trend over 2007/08-2011/12

period

MRCC Headline results compare very favourably with

RRC peer group

c. Non-monetary (‘book entry’) items as percentage of Headline Results

Range between 9.64 – 64.46 %.

Above 20 % in 3 of 5 years

Evidence of an increasing trend



Slightly decreasing trend

Quality of MRCC’s Headline results questionable due to

significance of non-monetary items

d. Capital Grants as percentage of Headline Results

Range between 10.02 – 114.89 %.


Evidence of an increasing trend

Range between 56.97 – 174.98 %.

Evidence of a clearly increasing trend.

Quality of reported earnings in 3 of 5 years questionable due

to significance of capital grants.

e. Combined Non-monetary items and Capital Grants as percentage of Headline Results

Range between 29.25 – 124.53 %. Above 20 % in all 5

years

Clearly increasing trend

Range between 86.96 – 260.16 %. Significantly above 20 % in all 5 years

Clearly increasing trend Significant size of non-monetary and capital grant

items in reported (Headline) results indicate that the

MRCC’s reported operating results during 2007/08-

2011/12 are not a reliable indicator of underlying

operational performance.

Summary: Non-monetary Items, ‘book entry’ adjustment items, and Capital Grants account for a significant percentage of the MRCC’s reported Headline Results (Surplus / Deficit) – ranging between 29.25 – 124.53 % during the 2007/08-2011/12 period. Using 20 % as the benchmark above which reported (Headline) earnings are considered to be a poor indicator of underlying operational performance, the MRCC’s reported Headline Results are not considered to be a reliable measure of the MRCC’s underlying operational performance.

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Table 3 - Summary: MRCC’s Liquidity 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment

3. LIQUIDITY – the degree to which an organization is able to meet financial obligations as and when they fall due (akin to ‘solvency’)

a. Underlying Surplus / (Deficit)

Range between $2.368 – 8.948

million. Above RRC peer group average

in 4 of 5 years

Marginally deteriorating trend

2008 - $8.948 million 2012 - $7.934 million


million

Clearly increasing trend 2008 – 2.872 million 2012 – 4.930 million

MRCC underlying Surplus compares favourably with RRC

peer group. Deteriorating trend a concern at time when

RRC peer group is trending upwards

b. Underlying Surplus / (Deficit) less Capital Grants

Range between $(1.779) – 7.809

million. Above RRC peer group average

in all 5 years

Clearly deteriorating trend

2008– $7.809 million 2012– $0.146 million

RRC average - Underlying deficit

in 4 of 5 years.

Clearly deteriorating trend. Average deficit for 2011/12 - $(4.060)

million

Although above RRC peer group average, MRCC

performance deteriorating significantly during 2007/08-

2011/12 period

c. Underlying Surplus / (Deficit) as a percentage of Underlying Revenue

Range between 2.83 – 11.07 %. Average across 5 years – 7.79

%


2008 – 11.07 % 2012 – 8.13 %


Average across 5 years – 5.0 %

Upward (improving) trend

MRCC has been performing better than RRC peer group average across all 5 years.

Results do show a deteriorating trend.

d. Net Cash Flow from Operations as percentage of Underlying Revenue

On par with RRC peer group. Range

between 25.27-34.93 %.

Slightly deteriorating trend before spike in

2011/12

Range between 22.33-31.18 %

Clearly improving (upward) trend

MRCC’s Net Cash Flow from Operations has been on par

with RRC peer group

e. Net Cash Flow as percentage of Underlying Revenue

Range between -4.78 – 3.91 %. Average

across 5 years – 0.974 %


2008 – 2.84 % 2012 – 1.54 %

(-4.78 % in 2011)



Evidence of slightly deteriorating trend

MRCC’s Net Cash Flow as % of Underlying Revenue has

deteriorated over the 2007/08-2011/12 period and

has been significantly less than RRC peer group average.

72

Table 3 - Summary: MRCC’s Liquidity 2007/08-2011/12 (Con’t)

Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment


f. Current Ratio Range between 1.38 – 2.53. Average across 5 years –

1.948

Clearly deteriorating trend.

2008 – 2.43 2012 – 1.38

Range between 1.77-2.42. Average

across 5 years – 2.236

Consistent during 2007/08-2010/11.

Significant decrease to 1.77 in 2011/12

2008 – 2.35 2011 – 2.33 2012 – 1.77

MRCC’s Current Ratio is clearly deteriorating over the 5 years and is significantly lower than

RRC peer group average

g. Holdings of Cash and Cash Equivalents (CCEs) as percentage of Rate Base

Range between 56.77 – 72.44 %. Below RRC peer

group average in 4 of 5 years

Slight upward trend. CCEs as percentage

of Rate Base. 2008 – 62.35 % 2012 – 72.44 %


Clearly improving trend. CCEs as percentage of

Rate Base. 2008 – 64.29 % 2012 – 70.48 %

MRCC generally on par with RRC peer group average.

Summary: MRCC’s Underlying Surplus and Underlying Surplus less Capital Grants are clearly demonstrating a deteriorating trend over the 2007/08-2011/12 period which is a concern as this indicates a gradual deterioration in underlying operational performance over the 2007/08-2011/12 period. Not surprisingly, deteriorating underlying performance is resulting in deteriorating Net Cash Flows over the same period. Although holdings of cash and cash equivalents have been on par with the RRC peer group, the MRCC’s Current Ratio has deteriorated significantly over the 2007/08-2011/12 period. In a nutshell, deteriorating Net Cash Flows (in actual dollar terms and as a percentage of Underlying Revenue) and deteriorating Current Ratio over the 2007/08-2011/12 period support the view that the MRCC’s liquidity has deteriorated significantly over the 2007/08-2011/12 period.

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Table 4 - Summary: MRCC’s Indebtedness 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment

4. INDEBTEDNESS – the amount of total liabilities, including interest bearing debt that is owing to external parties.

a. Total Liabilities ($) Total Liabilities as at 30 June 2012 $50.7

million. 4th most indebted Council in

RRC peer group.

Clearly increasing trend – Total

Liabilities grew by 44.64 % during

2007/08-2011/12. 2008 - $35.1 million 2012 - $50.7 million

Average Total Liabilities as at 30 June 2012 $45.2

million.

Clearly increasing trend – Average growth in

Total Liabilities for RRC peer group during

2007/08-2011/12 – 63.78 %

MRCC’s level of indebtedness has increased significantly during 2007/08-2011/12

period

b. Total Liabilities as percentage of Underlying Revenue

At 30 June 2012 – 52.0 %

Clearly increasing trend.

2008 – 43.38 % 2012 – 52.0 %

At 30 June 2012 - 44.80 %

Slightly increasing trend 2008 – 41.76 % 2012 – 44.80 %

MRCC’s Total Liabilities as percentage of Underlying

Revenue 16.07 % higher than RRC peer group average

c. Interest Bearing Debt (IBD) ($)

Total IBD as at 30 June 2012 - $19.616

million. 3rd most indebted Council in

RRC peer group.

Clearly increasing trend. Interest

Bearing Debt grew by 18.62 % during 2007/08-2011/12.

2008 - $16.5 million 2012 - $19.6 million

Average Total IBD as at 30 June 2012 -

$14.705 million.

Clearly increasing trend. Interest Bearing Debt

grew by 22.11 % during 2007/08-2011/12.

MRCC’s level of outstanding interest bearing debt has

increased significantly during 2007/08-2011/12. As of 30

June 2012, MRCC’s outstanding interest bearing debt was 33.4 % higher than the RRC peer group average

d. Interest Bearing Debt as percentage of Rate Base

At 30 June 2012 – 40.25 %

Very slight decreasing trend.

IBD as percentage of Rate Base 42.71 % in

2008.

At 30 June 2012 – 34.43 %

Significantly decreasing trend – from 42.91 % in

2008 to 34.43 % in 2012.

MRCC 2nd most indebted Council in RRC peer group – 16.9 % higher than RRC peer

group average at 30 June 2012.

e. Interest Bearing Debt as percentage of Underlying Revenue

At 30 June 2012 – 20.11 %

Consistent – IBD as percentage of

Underlying Revenue 2008 – 20.45 % 2012 – 20.11 %

At 30 June 2012 – 15.99 %

Significantly decreasing trend

2008 - 21.21 % 2012 - 15.99 %

MRCC 2nd most indebted Council in RRC peer group – 25.8 % higher than RRC peer

group average at 30 June 2012.

74

Table 4 - Summary: MRCC’s Indebtedness 2007/08-2011/12 (Con’t)



f. Underlying Surplus / Deficit to Borrowing Costs Multiple

2008 – 8.25 2012 – 8.18

Consistent – 8.25 in 2008.

At 30 June 2012 – 8.84

Clearly improving trend – from 5.36 in 2008 to

8.84 in 2012

MRCC on par with RRC peer group average at 30 June 2012

g. Underlying Surplus / (Deficit) less Capital Grants to Borrowing Costs Multiple

2008 – 7.2 2012 – 0.15

Significantly deteriorating trend – from 7.2 in 2008, to

0.15 in 2012

At 30 June 2012 – -4.26. This is a

disastrous result for RRC peer group

Significantly deteriorating trend

from -0.18 in 2008 to -4.26 in 2012

MRCC’s capacity to cover borrowing costs after Capital

Grants removed from analysis has all but evaporated.

Significantly better than RRC peer group average, but in no

way an acceptable result.

h. Net Cash Flow to Borrowing Costs Multiple

2008 – 2.12 2012 – 1.55

(2011 - -4.04)

Deteriorating trend – from 2.12 in 2008 to

1.55 in 2012

At 30 June 2012 – 0.65. A very poor

result

Significantly deteriorating trend – from 4.74 in 2008 to

0.65 in 2012

MRCC’s capacity to cover borrowing costs based upon

Net Cash Flow has deteriorated significantly

during the 2007/08-2011/12 period. Although marginally better than RRC peer group

average in 2012, a poor result.

Summary: Depending upon the measure used, the MRCC is the 2nd or 3rd most indebted Council within the RRC peer group. There has been significant growth in both Total Liabilities (44.64 %) and Interest Bearing Debt (18.62 %) during the 2007/08-2011/12 period, growing at an average annual rate of 9.93 % and 3.72 % respectively during the 2007/08-2011/12. Although the MRCC’s Interest Bearing Debt as of 30 June 2012 was still 40.25 % of the MRCC’s Rate Base, and therefore classified as ‘low risk’ based upon Victorian Auditor General’s guidelines (40% is the benchmark), the clear trend of increasing indebtedness at a time when the RRC peer group’s level of indebtedness relative to both Underlying Revenue and Rate Base is decreasing is a concerning observation. This concern is heightened due to the fact that the MRCC’s capacity to meet annual borrowing costs associated with Interest Bearing Debt – as measured by both Underlying Surplus less Capital Grants to Borrowing Costs Multiple and Net Cash Flow to Borrowing Costs Multiple - has been declining during the 2007/08-2011/12 period.

75

Table 5 - Summary: MRCC’s Capital Asset Management 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment

5. CAPITAL INVESTMENT – indicators of how local Councils are managing their capital assets (Infrastructure, Property, Plant and Equipment)

a. Average Depreciation Rate – Infrastructure, Property, Plant & Equipment (IPPE) assets

At 30 June 2012 – 2.56 %

Clear downward trend – from 3.25 % in 2008 to 2.56 % in 2012. Depreciation

rate applied to capital assets higher than RRC peer group

average.

At 30 June 2012 – 2.21 %

Clear downward trend – from 2.52 % in 2008 to

2.21 % in 2012. All Councils within the RRC

peer group with the exception of La Trobe

have been reducing the rate at which they are depreciating capital

assets

A significant decline in the actual depreciation rate applied in 2011/12 is a

concern. Given that MRCC’s capital assets have grown

during the 2007/08-2011/12 period (see Table 7), the fall in

average depreciate rate indicates deliberate

intervention by MRCC management in Accounting

Policy relating to depreciation.

b. Capital Stock Multiple

Range between 5.23-5.73. MRCC’s capital

stock multiple is lowest in RRC peer

group.

Slightly increasing trend – from 5.7 in

2008 to 5.73 in 2012

Range between 7.30-7.66.

Slightly declining trend – from 7.44 in 2008 to

7.32 in 2012

On-going capital renewal and maintenance impost on

operating budget lower for MRCC relative to other

Councils in RRC peer group

c. Capital Replacement Ratio


2008 – 5.7 2012 – 5.73

Significantly increasing trend –

largely due to significant increase

in capital investment in 2011/12 (re

February 2011 flood event)


Significantly increasing trend. Expenditures associated with flood reparations in 2011 a large contributor to

increased Capital Replacement Ratio in

2011/12.

MRCC on par with RRC peer group average

Summary: Capital Stock Multiple is lower than RRC peer group average. Capital Replacement Ratio on par with RRC peer group average. Decline in Average Depreciation Rate applied to capital assets (IPPE) is a major concern as it indicates deliberate intervention by MRCC management in Accounting Policy relating to depreciation.

76

Table 6 - Summary: MRCC’s External Grant Funding 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment

6. EXTERNAL GRANT FUNDING – Amount of external grant funding received from State and/or Federal governments.

a. Operating grants as percentage of Underlying Revenue


Consistently above RRC peer group

average.

Consistent – no clear evidence of trend.

2008 – 25.14 %, 2012 – 25.29 %

Range between 20.74 – 23.97 %

Consistent. 2008 – 22.74 % 2012 – 22.63 %

MRCC ranks 3rd in RRC peer group in relation to the receipt of operating grants relative to

Underlying Revenue

b. Capital grants as percentage of Underlying Revenue


Consistently below RRC peer group

average.


2008 – 1.41 % 2012 – 7.98 %


Clearly increasing trend. 2008 – 4.91 %

2012 – 10.27 %

MRCC significantly below RRC peer group average during

2007/08-2009/10. Significant increase in Capital Grants during 2010/11-2011/12

brings MRCC more into line with RRC peer group average.

c. Total grants as percentage of Underlying Revenue



2008 – 26.55 % 2012 – 33.27 %


Clearly increasing trend. 2008 – 27.65 % 2012 – 32.90 %

MRCC on par with RRC peer group average.

Summary: MRCC has done well in relation to Operating Grant funding – ranking 3rd in RRC peer group relative to Underlying Revenue. Performance in relation to Capital Grant funding has not been as good although more in line with RRC peer group average during 2010/11-2011/12. Overall, MRCC on par with RRC peer group in terms of total Operating and Capital Grants received relative to Underlying Revenue. With an average Total External Grants as a percentage of Underlying Revenue between 27.65 – 32.90 %, it is clear that all Councils within the RRC peer group are significantly dependent upon external grant funding to remain financially viable.

77

Table 7 - Summary: MRCC’s Growth in Key Financial Indicators 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment

7. GROWTH – in order to be financially sustainable in the long-term, growth rate in Underlying Revenue must exceed growth rate in Total Expenses AND Growth rate in Liabilities and Interest Bearing Debt.

a. Rate Base 25.88 % n.a. 31.90 % n.a. MRCC Rate Base growth significantly less than RRC

peer group average

b. Underlying Revenue 20.66 % n.a. 41.56 % n.a. MRCC Underlying Revenue growth significantly less than

RRC peer group average

c. Underlying Revenue less Capital Grants

12.62 % n.a. 32.61 % n.a. MRCC Underlying Revenue less Capital Grants growth significantly less than RRC

peer group average

d. Total Expenses 24.64 % n.a. 35.68 % n.a. MRCC Total Expenses growth significantly less than RRC

peer group average

e. Net Income (Growth in Underlying Revenue less Growth in Total Expenses)

-3.98 % Total Expenses have

been growing at a rate that is 3.98 %

greater than Underlying Revenue.

This is a fundamentally unsustainable

scenario.

n.a. 5.88 % Note: Peer group

average skewed by Horsham (32.91 %)

and Wodonga (43.25 %). In all, 6 of 11 Councils in RRC peer group have a negative

Net Income growth rate.

n.a. Negative Net Income Growth rate is a MAJOR problem. It is

a scenario that is unsustainable in the long-

term. Long-term prognosis if Net Income growth rate does

not change – perpetual operating deficits.

78

Table 7 - Summary: MRCC’s Growth in Key Financial Indicators 2007/08-2011/12 (Con’t)



f. Total Liabilities 44.64 % Significantly lower

than RRC peer group average.

Average annual growth rate – 8.93 %

60.07 % Average annual growth rate – 12.01 %

Although MRCC growth in Total Liabilities significantly lower than RRC peer group average, two (2) significant

points need to be highlighted: (i) MRCC’s initial indebtedness already high; (ii) growth rate

in Total Liabilities significantly greater than growth rate in

Underlying Revenue

g. Interest Bearing Debt

18.62 % Significantly higher

than RRC peer group average.


11.23 %


MRCC’s growth in Interest Bearing Debt is significantly higher than RRC peer group

average for 2007/08-2011/12 period.

h. Depreciation – Capital Assets (IPPE)

-4.35 % Significantly lower

than RRC peer group average

The ONLY Council in RRC peer group to

record negative growth in

Depreciation Expense during

2007/08-2011/12 period.

22.26 % Average annual growth in Depreciation Expense

– 4.45 %

Negative growth in Depreciation Expense a

MAJOR concern. Particularly given growth in Capital Assets of 21.31 % during same time

period. Indicates direct intervention in accounting

policy to reduce Depreciation Expense.

79

Table 7 - Summary: MRCC’s Growth in Key Financial Indicators 2007/08-2011/12 (Con’t) Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment


i. Growth in Capital Assets (Infrastructure, Property, Plant & Equipment)



MRCC’s growth in Capital Assets lowest in RRC peer

group.

j. Growth Differential (Depreciation of Capital Assets v Growth in Capital Assets)

-25.55 % 3rd worst result for RRC peer group.

Growth Differential of -25.55 % indicates that the MRCC is not matching Depreciation Expense to changes in Capital Asset values.

-14.83 % Indicates that Councils in RRC peer group are

not matching depreciation expense to changes in capital asset valuations.

Depreciation Expense is being fundamentally understated.

Depreciation Expense is being fundamentally understated. Consistent with finding that

there has been intervention to reduce Depreciation Expense

(see Table 5).

k. Operating Grants 21.38 % n.a. 40.63 % n.a. MRCC’s growth in operating grants during 2007/08-

2011/12 2nd worst in RRC peer group.

Summary: There are a number of MAJOR concerns from the results presented in Table 7: - Growth rates in revenue (Rate Base – 25.88 %, Underlying Revenue – 20.66 %, Underlying Revenue less Capital Grants – 12.62 %) significantly lower

than RRC peer group averages; - Growth rate in Total Expenses at 24.64 % is lower than RRC peer group average but significantly higher than growth rate in Underlying Revenue

(20.66 %) and Underlying Revenue less Capital Grants (12.62 %); - Negative Net Income Growth rate of -3.98 % in relation to Underlying Revenue (or 12.02 % for Underlying Revenue less Capital Grants) is

fundamentally unsustainable in the longer term; - Growth rate in Total Liabilities (44.64 %) and Interest Bearing Debt (18.62 %) significantly greater than growth rate in Underlying Revenue less

Capital Grants (12.62 %) – this scenario is unsustainable in the longer term; - Negative Growth Differential (Depreciation Expense versus Capital Assets) of -25.55 % is a major concern and indicates a significant under-

statement of Depreciation Expense. Taken together, the five key findings highlighted above should raise significant concerns about the on-going financial health of the MRCC.

80

Table 8 - Summary: MRCC’s Operating Efficiency 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment

8. OPERATING EFFICIENCY – indicators of the relationship between inputs and outputs. Operating efficiency will ultimately have an impact (positive or negative) upon on-going financial performance.

a. Total Expenses / Underlying Revenue


Slightly increasing trend.

2008 – 88.93 % 2012 – 91.87 %


Slightly decreasing trend.

2008 – 97.27 % 2012 – 93.50 %

MRCC under RRC peer group average in 4 of 5 years.

b. Total Expenses / Rate Base

Range between 1.81 – 191

Consistent 2008 – 1.8574 2012 – 1.8392

Range between 1.98 – 2.05

Slightly increasing trend 2008 – 2.0137 2012 – 2.0488

MRCC consistently under RRC peer group average

c. Underlying Revenue / Employee Benefits

2012 – 2.22 Deteriorating trend 2008 – 3.06 2012 – 2.22


MRCC significantly below RRC peer group average during 2009/10-2011/12 period

d. Employee Benefits / Rate Base

2012 – 90.35 % Deteriorating trend 2008 – 68.28 % 2012 – 90.35 %


MRCC on par with RRC peer group average

e. Employee Benefits as percentage of Total Expenses



MRCC consistently higher than RCC peer group average

f. Employee Benefits as percentage of Materials, Contractors and Services Costs



MRCC consistently higher than RCC peer group average.

Deterioration in trend between 2007/08-2011/12

significantly worse than RRC peer group average

81

Table 8 - Summary: MRCC’s Operating Efficiency 2007/08-2011/12 (Con’t)



g. Growth in Total Expenses

24.64 % n.a. 35.68 % n.a. MRCC Total Expenses growth significantly less than RRC

peer group average

h. Growth in Employee Benefits

66.56 % n.a. 66.09 % n.a. MRCC Employee Benefits growth on par with RRC peer

group average

i. Materials, Contractors and Services costs as percentage of Underlying Revenue

29.75 % 2nd worst result in

RCC peer group

Deteriorating trend 2008 – 35.23 % 2012 – 29.75 %

32.4 % Deteriorating trend 2008 – 41.2 % 2012 – 32.4 %

MRCC significantly below RRC peer group average with a

deteriorating trend. Translation of Underlying Revenue into on-ground

service delivery is poor and getting worse.

Summary: Note: Defined Benefits Plan Superannuation Special Call included for all 11 Councils in RRC peer group. Performance of the MRCC in terms of operational efficiency is mixed:

- On basis of Total Expenses as a percentage of Rate Base - MRCC (183.9 %) slightly under RRC peer group average (204.9 %). - On basis of Employee Benefits as a percentage of total operating expenses – MRCC (49.12 % in 2012) consistently higher than RRC peer group

average (43.67 %), indicating that there may be potential over-staffing at MRCC. This is particularly so in relation to Employee Benefits as percentage of Materials, Contractors and Service Costs, which is an indicator of employment costs relative to on-ground service delivery. On the basis of this measure, the MRCC’s performance (151.7 %) is significantly higher than RRC peer group average (127.6 %).

- In relation to growth in Total Expenses, MRCC (24.64 %) has performed significantly better than RRC peer group average (35.68 %). - In relation to growth in Employee Benefits, MRCC (66.56 %) has performed on par with RRC peer group average (66.09 %). - In relation to translation of Underlying Revenue into on-ground service delivery, the MRCC’s performance (29.75 %) is poor relative to RRC peer

group average (32.4 %) and deteriorating (along with the RRC peer group of Councils as a whole).

82

Table 9 - Summary: MRCC’s Rate Base as percentage of Underlying Revenue 2007/08-2011/12 Measure MRCC – 2011/12 MRCC - Trend Peer Group Peer Group - Trend Assessment

9. OTHER INDICATORS – size of Rate Base relative to Underlying Revenue.

a. Rate Base as a percentage of Underlying Revenue

2012 – 49.95 % Increasing trend 2008 – 47.88 % 2012 – 49.95 %

2012 – 46.34 % Decreasing 2008 – 48.70 % 2012 – 46.34 %

MRCC trending in opposite direction to RRC peer group. Significance – highlights why reliance upon indebtedness relative to Rate Base can be

misleading if size of Rate Base relative to Underlying

Revenue is not taken into account, nor changes in the

relative size of Rate Base relative to Underlying

Revenue over time. Thus, a set rule such as Debt = 40 % of Rate Base will hide increasing

indebtedness if a Council’s Rate Base relative to

Underlying Revenue is increasing.

Summary: MRCC’s Rate Base relative to Underlying Revenue is increasing. This is significant due to the fact that the MRCC has been citing Interest Bearing Debt relative to Rate Base – but have failed to acknowledge that the MRCC’s Rate Base relative to Underlying Revenue is increasing. As such, increases in Interest Bearing Debt are being understated. Indebtedness must be cited relative to Underlying Revenue as this will automatically cater for any changes in the relative size of a Council’s Rate Base relative to Underlying Revenue.

83

Specific findings – Chapter 6: Comparative performance evaluation – MRCC v

Similar Size Councils peer group (2007/08-2011/12)

85

Table 1 - Summary: MRRC’s Socio-Economic Context relative to Similar Sized Councils peer group Measure MRCC – 2011/12 MRCC - Trend Peer Group Peer Group - Trend Assessment

1. SOCIO-ECONOMIC INDICATORS a. Population 50 997

53 8772

Population has declined by 1.6 % during 2006-2011

period

48 627 Population has grown by 4.58 %. Peer group average dominated by

Cardinia – 26.67 % growth

MRCC LGA population 4.87 % above SSC LGA average.

Stagnant population growth a real concern.

b. LGA size 22 087 square kilometres

Largest LGA in Victoria

n.a. 6 869 square kilometres

n.a. MRCC LGA largest in Victoria, 3.22 times larger than SSC

average LGA size.

c. Number of Rateable Properties

27 813

n.a. 24 823 n.a. MRCC 9.9 % above SSC average.

d. Geographical dispersion of Rateable Properties (RPs)

1.26 RPs per square kilometre

n.a. 15.06 RPs per square kilometre

n.a. MRCC LGA the most geographically dispersed of

the 10 SSCs.

e. SIEFA Index of Relative Advantage / Disadvantage

924 – 77 of 79 in Victoria (3rd lowest)

Ranking has fallen from 68 of 79 in

2006 (11th lowest)

SSC Average - 982 n.a. MRCC LGA community the most disadvantaged of the 10

SSC communities.

f. SIEFA Index of Relative Disadvantage


n.a. SSC Average - 993 n.a. MRCC LGA community the most disadvantaged of the 10

SSC communities.

g. SIEFA Index of Economic Resources



SSC communities.

h. SEIFA Index of Education and Occupation



SSC communities.

2 Note: Population figures based upon official ABS Census data. The author acknowledges that differences do exist in ‘official’ records in relation to population figures. Department of Planning and Community Development (Victoria) cite population of Mildura Rural City LGA as 53877 as of June 2009.

86

Table 1 - Summary: MRCC’s Socio-Economic Context (Con’t) Measure MRCC – 2011/12 MRCC - Trend Peer Group Peer Group - Trend Assessment


i. Rates & Charges per person

$955.62 – 2nd most expensive of 11 SSCs

n.a. SSC average - $855.21

n.a. MRCC 11.74 % higher than SSC average.

j. Rates & Charges per person adjusted for SEIFA Index of Advantage and Disadvantage

$1136.61 n.a. SSC average - $963.23


k. Rates & Charges per Rateable Properties

$1785.98 – 5th most expensive of 11 SSCs

n.a. SSC average - $1680.39


l. Rates & Charges per Rateable Property adjusted for SEIFA Index of Advantage and Disadvantage

$2124.23 n.a. $1880.21 n.a. MRCC 12.98 % higher than SSC average.

m. Regional Competitive Index (Regional Australia Institute 2013)

1 = Least Competitive

11th of 11 SSCs in Victoria

n.a. Average = 3.20 n.a. MRCC LGA rated as among the least competitive in Australia. 10th of 10 in Victorian SSC peer

group.

Summary: MRCC has slightly higher population and absolute number of rateable properties compared to SSC peer group average, but also has a significantly larger geographically dispersed LGA. As to how these factors contribute toward any relative cost disadvantage (and therefore relative cost per unit of service delivery) compared to other Councils within the SSC peer group is unknown. Significantly, the MRCC LGA community is one of the most disadvantaged communities in Victoria based upon a range of different SEIFA measures, including income, access to non-income economic resources, education, and skills-base. The MRCC LGA community is the disadvantaged community within the SSC peer group based upon all 4 SIEFA indexes included in the analysis (Index of Relative Socio-economic Advantage and Disadvantage, Index of Relative Disadvantage, Index of Economic Resources, Index of Education and Occupation (skills / education base). However, the MRCC LGA is also among the most expensive in terms of rates and charges on both a per person and per rateable property basis. Finally, according to the Regional Australia Institute, the MRCC LGA is among the least competitive in Australia, and ranks 10th out of 10 within the SSC peer group of local Councils, the only LGA within the SSC peer group that is rated in the ‘least competitive’ category.

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Table 2 - Summary: MRCC’s Earnings Quality 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment

2. EARNINGS QUALITY – the degree to which reported (‘Headline’) operating results are indicative of underlying operational performance

a. Reported (Headline) Operating Results

Above SSC average in 3 of 5 years –

between $3.847 - $22.327 million

No clear trend due to inconsistencies

between years.

Average between $9.341 - $12.367

million

Clear, though slight upward trend.

MRCC ranked 2nd or 3rd of 10 SSCs. 2011/12 result of

$22.327 million 2nd best result within SSC peer group

b. Headline Operating Results [ Headline Surplus / (Deficit) as percentage of Headline Revenue]

Above SSC average in 3 of 5 years,


Evidence of improving trend in reported Headline

Results. Range: 4.52-19.94 %

Range: 11.61-15.21 %,


Consistent over 2007/08-2011/12

period 2008 – 12.99 % 2012 – 12.97 %

MRCC Headline results compare very favourably with

SSC peer group

c. Non-monetary (‘book entry’) items as percentage of Headline Results



Evidence of an increasing trend 2008 – 10.02 % 2012 – 64.46 %


years


2008 – 60.76 % 2012 – 50.06 %

Quality of MRCC’s Headline results questionable due to

significance of non-monetary items

d. Capital Grants as percentage of Headline Results

Range between 17.66 – 114.89 %.


Evidence of an increasing trend 2008 – 19.23 % 2012 – 34.88 %

Range between 85.64 – 245.59 %.

Evidence of a clearly increasing trend. 2008 – 84.40 % 2012 – 99.01 %

Quality of reported earnings in 3 of 5 years questionable due

to significance of capital grants.

e. Combined Non-monetary items and Capital Grants as percentage of Headline Results


years

Clearly increasing trend

2008 – 29.25 % 2012 – 99.35 %

Range between 111.15 – 145.16 %. Significantly above 20 % in all 5 years

No clear trend evident 2008 – 145.16 % 2012 – 144.28 %

Significant size of non-monetary and capital grant

items in reported (Headline) results indicate that the

MRCC’s reported operating results during 2007/08-

2011/12 are not a reliable indicator of underlying

operational performance.

Summary: Non-monetary Items and Capital Grants account for a significant percentage of the MRCC’s reported Headline Results (Surplus / Deficit) – ranging between 111.15 – 145.16 % during the 2007/08-2011/12 period. Using 20 % as a benchmark above which reported earnings are considered to be a poor indicator of underlying operational performance, the MRCC’s reported Headline Results during the 2007/08-2011/12 period are not a reliable measure of the MRCC’s underlying operational performance.

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Table 3 - Summary: MRCC’s Liquidity 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment


a. Underlying Surplus / (Deficit)


million. Above SSC peer group average

in 4 of 5 years


2008 – $8.948 million

2012 - $7.934 million


million

Clearly increasing trend 2008 – 1.860 million 2012 – 3.538 million

MRCC underlying Surplus compares favourably with SSC

peer group. Deteriorating trend a concern at time when

SSC peer group is trending upwards

b. Underlying Surplus / (Deficit) less Capital Grants

Range between $(1.779) – 7.809

million. Above SSC peer group average

in all 5 years


2008 – $7.809 million

2012 - $0.146 million

SSC average - Underlying deficit

in 4 of 5 years.

Clearly deteriorating trend. Average deficit for 2011/12 - $(4.111)

million

Although above SSC peer group average, MRCC

performance deteriorating significantly during 2007/08-

2011/12 period

c. Underlying Surplus / (Deficit) as a percentage of Underlying Revenue

Range between 2.83 – 11.07 %. Average across 5 years – 7.79

%


2008 – 11.07 % 2012 – 8.13 %



Upward (improving) trend

2008 – 1.84 % 2012 – 4.14 %

MRCC has been performing better than SSC peer group average across all 5 years.

Results do show a deteriorating trend.

d. Net Cash Flow from Operations as percentage of Underlying Revenue

On par with SSC peer group. Range

between 25.27-34.93 %.

Slightly deteriorating trend before spike in

2011/12

Range between 22.89-31.91 %

Clearly improving (upward) trend 2008 – 22.89 % 2012 – 31.91 %

MRCC’s Net Cash Flow from Operations has been on par with SSC peer group average

e. Net Cash Flow as percentage of Underlying Revenue

Range between -4.78 – 3.91 %. Average

across 5 years – 0.974 %


2008 – 2.84 % 2012 – 1.54 %

Range between -5.28 – 7.89 %.


Evidence of significantly improving trend, albeit

from a poor base 2008 - -5.28 % 2012 – 2.89 %

MRCC’s Net Cash Flow as % of Underlying Revenue has

deteriorated over the 2007/08-2011/12 period and has been less than SSC peer

group average in 3 of 5 years.

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Table 3 - Summary: MRCC’s Liquidity 2007/08-2011/12 (Con’t)



f. Current Ratio Range between 1.38 – 2.53. Average across 5 years –

1.948

Clearly deteriorating trend.

2008 – 2.43 2012 - 1.38

Range between 1.99-2.65. Average

across 5 years – 2.42

Consistent during 2007/08-2010/11.

Significant decrease to 1.994 in 2011/12

MRCC’s Current Ratio is clearly deteriorating over the 5 years and is significantly lower than

SSC peer group average

g. Holdings of Cash and Cash Equivalents (CCEs) as percentage of Rate Base

Range between 56.77 – 72.44 %. Below SSC peer

group average in 4 of 5 years

Slight upward trend. 2008 – 62.35 % 2012 – 72.44 %


Clearly improving trend. 2008 – 51.19 % 2012 – 71.45 %

MRCC generally on par with SSC peer group average.

Summary: MRCC’s Underlying Surplus and Underlying Surplus less Capital Grants are clearly demonstrating a deteriorating trend which is a concern as this indicates a gradual deterioration in underlying operational performance over the 2007/08-2011/12 period. Not surprisingly, deteriorating underlying performance is resulting in deteriorating Net Cash Flows over the same period. Although holdings of cash and cash equivalents have been on par with the SSC peer group, the MRCC’s Net Cash Flow and Current Ratio have both been deteriorated significantly over the 2007/08-2011/12 period.

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Table 4 - Summary: MRCC’s Indebtedness 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment


a. Total Liabilities ($) Total Liabilities as at 30 June 2012 $50.7

million. 4th most indebted Council in

SSC peer group.

Clearly increasing trend – Total

Liabilities grew by 44.64 % during

2007/08-2011/12.

Average Total Liabilities as at 30 June 2012 $39.8

million.

Clearly increasing trend – Average growth in

Total Liabilities for SSC peer group during

2007/08-2011/12 – 33.65 %

MRCC’s level of indebtedness has increased significantly during 2007/08-2011/12

period. Rate of increase 32.66 % higher than SSC peer group

average

b. Total Liabilities as percentage of Underlying Revenue

At 30 June 2012 – 52.0 %

Clearly increasing trend – up from 43.38 % in 2008.

At 30 June 2012 – 49.42 %

Clearly decreasing trend 2008 – 54.92 % 2012 – 49.42 %

MRCC’s Total Liabilities as percentage of Underlying

Revenue only slightly higher than SSC peer group average

c. Interest Bearing Debt (IBD) ($)

Total IBD as at 30 June 2012 - $19.616

million. 3rd most indebted Council in

SSC peer group.

Clearly increasing trend. Interest

Bearing Debt grew by 18.62 % during 2007/08-2011/12.

2008 – $16.5 million 2012 - $19.6 million

Average Total IBD as at 30 June 2012 -

$16.734 million.

Clearly decreasing trend. Interest Bearing Debt reduced by 3.07 %

during 2007/08-2011/12.

2008 – 17.3 million 2012 – 16.7 million

MRCC’s level of outstanding interest bearing debt has

increased significantly during 2007/08-2011/12. As of 30

June 2012, MRCC’s outstanding interest bearing debt was 17.4 % higher than the SSC peer group average

d. Interest Bearing Debt as percentage of Rate Base

At 30 June 2012 – 40.25 %

Very slight decreasing trend.

IBD as percentage of Rate Base 42.71 % in

2008.

At 30 June 2012 – 39.74 %


2008 – 59.90 % 2012 – 39.74 %

MRCC 3rd most indebted Council in SSC peer group

even though IBD as percentage of Rate Base only

marginally higher than SSC peer group average

e. Interest Bearing Debt as percentage of Underlying Revenue

At 30 June 2012 – 20.11 %

Consistent – IBD as percentage of

Underlying Revenue 20.45 % in 2008

At 30 June 2012 – 20.44 %


2008 – 33.24 % 2012 – 20.44 %

MRCC on par with SSC peer group as at 30 June 2012

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Table 4 - Summary: MRCC’s Indebtedness 2007/08-2011/12 (Con’t)



f. Underlying Surplus / Deficit to Borrowing Costs Multiple

At 30 June 2012 – 8.18

Consistent 2008 – 8.25 2012 – 8.18

At 30 June 2012 – 5.42


2008 – 6.98 2012 – 5.42

MRCC better than SSC peer group average as at 30 June

2012

g. Underlying Surplus / (Deficit) less Capital Grants to Borrowing Costs Multiple

At 30 June 2012 – 0.15


2008 - 7.2 2012 - 0.15

At 30 June 2012 – -7.23. This is a

disastrous result for SSC peer group


2008 - -0.17 2012 - -7.23

MRCC’s capacity to cover borrowing costs after Capital

Grants removed from analysis has all but evaporated.

Significantly better than SSC peer group average, but in no

way an acceptable result.

h. Net Cash Flow to Borrowing Costs Multiple

At 30 June 2012 – 1.55

Deteriorating trend 2008 – 2.12 2012 – 1.55

At 30 June 2012 – 3.08. Significant

improvement over prior 2 years

Significantly improving trend – albeit from a

poor base 2008 - -1.43 2012 – 3.08

MRCC’s capacity to cover borrowing costs based upon

Net Cash Flow has deteriorated significantly

during the 2007/08-2011/12 period. Although marginally better than SSC peer group

across the 5 years, 2012 result (1.55) less than SSC peer

group average (3.08)

Summary: Depending upon the measure used, the MRCC is between the 2nd and 4th most indebted Council within the SSC peer group. There has been significant growth in both Total Liabilities and Interest Bearing Debt during the 2007/08-2011/12 period, growing at an average annual rate of 9.93 % and 3.72 % respectively during the 2007/08-2011/12. Although the MRCC’s Interest Bearing Debt as of 30 June 2012 was still 40.25 % of Rate Base, and therefore classified as ‘low risk’ based upon Victorian Auditor General’s guidelines, the clear trend of increasing indebtedness at a time when the SSC peer group’s level of indebtedness relative to both Underlying Revenue and Rate Base is decreasing is a concerning observation. This concern is heightened due to the fact that the MRCC’s capacity to meet annual borrowing costs associated with Interest Bearing Debt has been declining during the 2007/08-2011/12 period.

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Table 5 - Summary: MRCC’s Capital Asset Management 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment

5. CAPITAL – indicators of how local Councils are managing their capital assets (Infrastructure, Property, Plant and Equipment)

a. Average Depreciation Rate – Infrastructure, Property, Plant & Equipment (IPPE) assets

At 30 June 2012 – 2.56 %

Clear downward trend – from 3.25 % in 2008 to 2.56 % in 2012. Depreciation

rate applied to capital assets higher than SSC peer group

average in all 5 years.

At 30 June 2012 – 2.20 %

Clear downward trend – from 2.46 % in 2008 to

2.20 % in 2012. 4 Councils within the SSC peer group (Baw Baw, Campaspe, Macedon Ranges & Wellington) have increased their average depreciation rate applied to capital

assets

A significant decline in the actual depreciation rate applied in 2011/12 is a

concern. Given that MRCC’s capital assets have grown

during the 2007/08-2011/12 period (see Table 7), the fall in

average depreciation rate indicates deliberate

intervention by MRCC management in Accounting

Policy relating to depreciation.

b. Capital Stock Multiple

Range between 5.23-5.73. MRCC’s capital

stock multiple is lowest in SSC peer

group.

Slightly increasing trend

2008 – 5.70 2012 – 5.73


Slightly declining trend 2008 – 7.92 2012 – 7.43

On-going capital renewal and maintenance impost on

operating budget lower for MRCC relative to other

Councils in SSC peer group

c. Capital Replacement Ratio


Significantly increasing trend –

largely due to significant increase

in capital investment in 2011/12 (re

February 2011 flood event)


Significantly increasing trend. Expenditures associated with flood reparations in 2011 a large contributor to

increased Capital Replacement Ratio in

2011/12.

MRCC on par with SSC peer group average

Summary: The MRCC’s Capital Stock Multiple is lower than SSC peer group average. Capital Replacement Ratio on par with SSC peer group average. Decline in Average Depreciation Rate applied to capital assets (IPPE) is a major concern as it indicates deliberate intervention by MRCC management in Accounting Policy relating to depreciation.

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Table 6 - Summary: MRCC’s External Grant Funding 2007/08-2011/12 Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment

6. EXTERNAL GRANT FUNDING – Amount of external grant funding received from State and/or Federal governments.

a. Operating grants as percentage of Underlying Revenue


Consistently above SSC peer group

average.

Consistent – no clear evidence of trend.

2008 – 25.14 %, 2012 – 25.29 %


Slightly deteriorating trend

2008 – 21.74 % 2012 – 20.80 %

MRCC ranks in top 2 in SSC peer group in relation to the receipt of operating grants

relative to Underlying Revenue

b. Capital grants as percentage of Underlying Revenue


Consistently below SSC peer group

average.


2008 – 1.41 % 2012 – 7.98 %


Clearly increasing trend. 2008 – 6.54 %

2012 – 10.02 %

MRCC significantly below SSC peer group average in 4 of 5 years. Significant increase in

Capital Grants during 2010/11-2011/12 brought

MRCC more into line with SSC peer group average.

c. Total grants as percentage of Underlying Revenue



2008 – 26.55 % 2012 – 33.27 %



2008 – 28.28 % 2012 – 29.82 %

MRCC generally on par with SSC peer group average.

Summary: MRCC has done well in relation to Operating Grant funding – ranking in top 2 in SSC peer group relative to Underlying Revenue. Performance in relation to Capital Grant funding has not been as good although more in line with SSC peer group average during 2010/11-2011/12. Overall, MRCC on par with SSC peer group in terms of total Operating and Capital Grants received relative to Underlying Revenue. With an average Total External Grants as a percentage of Underlying Revenue between 27.46 – 30.61 %, it is clear that all Councils within the SSC peer group are significantly dependent upon external grant funding to remain financially viable.

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Table 7 - Summary: MRCC’s Growth in Key Financial Indicators 2007/08-2011/12



a. Rate Base 25.88 % n.a. 36.33 % n.a. MRCC Rate Base growth significantly less than SSC peer

group average

b. Underlying Revenue 20.66 % n.a. 44.02 % n.a. MRCC Underlying Revenue growth significantly less than

SSC peer group average

c. Underlying Revenue less Capital Grants

12.62 % n.a. 37.84 % n.a. MRCC Underlying Revenue less Capital Grants growth

significantly less than SSC peer group average

d. Total Expenses 24.64 % n.a. 37.60 % n.a. MRCC Total Expenses growth significantly less than SSC peer

group average

e. Net Income (Growth in Underlying Revenue less Growth in Total Expenses)

-3.98 % Total Expenses have

been growing at a rate that is 3.98 %

greater than Underlying Revenue.

This is a fundamentally unsustainable

scenario.

n.a. 7.99 % Note: In all, 6 of 11

Councils in SSC peer group have a

negative Net Income growth

rate.

n.a. Negative Net Income Growth rate is a MAJOR problem. It is

a scenario that is unsustainable in the long-

term. Long-term prognosis if Net Income growth rate does

not change – perpetual operating deficits.

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Table 7 - Summary: MRCC’s Growth in Key Financial Indicators 2007/08-2011/12 (Con’t)



f. Total Liabilities 44.64 % Significantly lower

than SSC peer group average.



Although MRCC growth in Total Liabilities significantly lower than SSC peer group average, two (2) significant

points need to be highlighted: (i) MRCC’s initial indebtedness already high; (ii) growth rate

in Total Liabilities significantly greater than growth rate in

Underlying Revenue

g. Interest Bearing Debt

18.62 % Significantly higher

than SSC peer group average.


0.99 %


MRCC’s growth in Interest Bearing Debt is significantly higher than SSC peer group

average for 2007/08-2011/12 period.

h. Depreciation – Capital Assets (IPPE)

-4.35 % Significantly lower

than SSC peer group average

The ONLY Council in SSC peer group to record negative

growth in Depreciation

Expense during 2007/08-2011/12

period.

21.93 % Average annual growth in Depreciation Expense

– 4.39 %

Negative growth in Depreciation Expense a

MAJOR concern. Particularly given growth in Capital Assets of 21.31 % during same time

period. Indicates direct intervention in accounting

policy to reduce Depreciation Expense.

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Table 7 - Summary: MRCC’s Growth in Key Financial Indicators 2007/08-2011/12 (Con’t) Measure MRCC MRCC - Trend Peer Group Peer Group - Trend Assessment


i. Growth in Capital Assets (Infrastructure, Property, Plant & Equipment)



MRCC’s growth in Capital Assets approximately mid-way

in SSC peer group.

j. Growth Differential (Depreciation of Capital Assets v Growth in Capital Assets)

-25.55 % 3rd worst result for SSC peer group.

Growth Differential of -25.55 % indicates that the MRCC is not matching Depreciation Expense to changes in Capital Asset values.

-3.49 % Indicates that Councils in SSC peer group are

not matching depreciation expense to changes in capital asset valuations.

Depreciation Expense is being fundamentally understated.

Depreciation Expense is being fundamentally understated. Consistent with finding that

there has been intervention to reduce Depreciation Expense

(see Table 5).

k. Operating Grants 21.38 % n.a. 46.32 % n.a. MRCC’s growth in operating grants during 2007/08-

2011/12 2nd worst in SSC peer group.

Summary: There are a number of MAJOR concerns from the results presented in Table 7:

- Growth rates in revenue (Rate Base – 25.88 %, Underlying Revenue – 20.66 %, Underlying Revenue less Capital Grants – 12.62 %) significantly lower than SSC peer group averages;

- Growth rate in Total Expenses at 24.64 % is lower than SSC peer group average but significantly higher than growth rate in Underlying Revenue (20.66 %) and Underlying Revenue less Capital Grants (12.62 %);

- Negative Net Income Growth rate of -3.98 % in relation to Underlying Revenue (or 12.02 % for Underlying Revenue less Capital Grants) is fundamentally unsustainable in the longer term;

- Growth rate in Total Liabilities (44.64 %) and Interest Bearing Debt (18.62 %) significantly greater than growth rate in Underlying Revenue less Capital Grants (12.62 %) – this scenario is unsustainable in the longer term;

- Negative Growth Differential (Depreciation Expense versus Capital Assets) of -25.55 % is a major concern and indicates a significant under-statement of Depreciation Expense.

Taken together, the five key findings highlighted above should raise significant concerns about the on-going financial health of the MRCC.

97



j. Total Expenses / Underlying Revenue



2008 – 88.93 % 2012 – 91.87 %


Slightly decreasing trend.

2008 – 98.16 % 2012 – 95.86 %

MRCC under SSC peer group average in 4 of 5 years.

k. Total Expenses / Rate Base

Range between 1.81 – 191

Consistent 2008 – 1.8574 2012 – 1.8392

Range between 1.82 – 1.93


2008 – 1.9261 2012 – 1.9073

MRCC under SSC peer group average in 3 of 5 years

l. Underlying Revenue / Employee Benefits



MRCC significantly below SSC peer group average during 2009/10-2011/12 period

m. Employee Benefits / Rate Base



MRCC significantly above SSC peer group average

n. Employee Benefits as percentage of Total Expenses



MRCC consistently higher than SSC peer group average

98



o. Employee Benefits as percentage of Materials, Contractors and Services Costs

2012 – 151.72 % Deteriorating trend 2008 – 92.79 %

2012 – 151.72 %

2012 – 110.14 % Deteriorating trend 2008 – 78.75 %

2012 – 110.14 %

MRCC consistently higher than RCC peer group average.

Deterioration in trend between 2007/08-2011/12 significantly worse than SSC

peer group average

p. Growth in Total Expenses

24.64 % n.a. 37.60 % n.a. MRCC Total Expenses growth significantly less than SSC peer

group average

q. Growth in Employee Benefits

66.56 % n.a. 61.91 % n.a. MRCC Total Expenses growth significantly less than SSC peer

group average

r. Materials, Contractors and Services costs as percentage of Underlying Revenue



MRCC significantly below SSC peer group average.

Translation of Underlying Revenue into on-ground

service delivery is deteriorating

Summary: Note: Defined Benefits Plan Superannuation Special Call included for all 10 Councils in SSC peer group. On basis of Total Expenses as a percentage of Underlying Revenue - MRCC (97.17 %) is on par with SSC peer group average (95.86 %). On basis of Employee Benefits (total employee costs) – MRCC is consistently higher than SSC peer group average – by a significant margin in 3 of 4 indicators using Employee Benefits, indicating that there is likely to be over-staffing at MRCC. As with analysis with RRCs, this is particularly so in relation to Employee Benefits as percentage of Materials, Contractors and Service Costs, which is an indicator of employment costs relative to on-ground service delivery. In relation to growth in Total Expenses, MRCC (24.64 %) has performed significantly better than SSC peer group (37.60 %). In relation to growth in Employee Benefits, MRCC (66.56 %) has performed somewhat worse than SSC peer group (61.91 %). In relation to the translation of Underlying Revenue into on-ground service delivery, the MRCC has performed worse than SSC peer group and the performance of the MRCC and the SSC peer group as a whole is deteriorating in relation to this measure.

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Table 9 - Summary: MRCC’s Rate Base as percentage of Underlying Revenue 2007/08-2011/12 Measure MRCC – 2011/12 MRCC - Trend Peer Group Peer Group - Trend Assessment

9. OTHER INDICATORS – size of Rate Base relative to Underlying Revenue.

a. Rate Base as a percentage of Underlying Revenue

2012 – 49.95 % Increasing trend 2008 – 47.88 % 2012 – 49.95 %

2012 – 50.83 % Slightly decreasing trend

2008 – 51.34 % 2012 – 50.83 %

MRCC trending in opposite direction to SSC peer group. Significance – highlights why reliance upon indebtedness relative to Rate Base can be

misleading if size of Rate Base relative to Underlying

Revenue is not taken into account, nor changes in the

relative size of Rate Base relative to Underlying

Revenue over time. Thus, a set rule such as Debt = 40 % of Rate Base will hide increasing

indebtedness if a Council’s Rate Base relative to

Underlying Revenue is increasing.

Summary: MRCC’s Rate Base relative to Underlying Revenue is increasing. This is significant due to the fact that the MRCC has been citing Interest Bearing Debt relative to Rate Base – but have failed to acknowledge that the MRCC’s Rate Base relative to Underlying Revenue is increasing. As such, increases in Interest Bearing Debt are being understated. Indebtedness must be cited relative to Underlying Revenue as this will automatically cater for any changes in the relative size of a Council’s Rate Base relative to Underlying Revenue.

101

Summary of key findings – Chapter 7 – Re-thinking the notion of financial

sustainability in the Victorian Local Government Sector

The key findings from the analysis presented throughout this chapter include:

1. The current process used by the Victorian Auditor General’s Office (VAGO) for evaluating

the financial sustainability of local Councils is fundamentally sound; however the author

is of the view that there are limitations inherent in the measurement of local Council

financial sustainability. These limitations include:

o The use of financial sustainability benchmarks (indicators) that appear to be too

‘soft’;

o Local Government accounting practices that allow for the reporting of potentially

misleading results through the inclusion of prepaid grant monies in Operating

Income in the year of receipt (as opposed to recording prepaid grant monies as

‘prepaid revenue’ – a current liability), and the inclusion of non-monetary (‘book

entry’) adjustments in reported Operating Income;

o There is a case for expanding the number of financial sustainability indicators

from six (6) to 10 in order to enhance the overall financial sustainability

assessment of individual local Councils; and,

o The current financial sustainability assessment process does not consider the

context within which local Councils operate – in particular, their local

community’s capacity and revenue growth potential.

2. The author proposed a revised set of financial sustainability indicators with tighter

minimum parameters. This adjusted set of financial sustainability indicators are

summarised in Table 1;

3. Not surprisingly, the application of the author’s revised financial sustainability indicators

to two groups of local Councils – the Regional and Rural Cities peer group, and a second

Similar Size Council peer group – resulted in a downgrade of both peer group averages

from ‘low risk’ to ‘medium risk’ in terms of an overall financial sustainability assessment;

102

4. The MRCC was located mid-way in both the Regional and Rural City and Similar Size

Council peer groups in terms of an overall financial sustainability assessment with a

‘medium risk’ rating;

5. An evaluation of the MRCC’s financial sustainability over the 2007/08-2016/17 actual

and projected period revealed a significant deterioration in the MRCC’s financial

sustainability assessment from 2011/12 to 2012/13 with no projected recovery over the

budget forecast period (2013/14-2016/17) – see Figure 2. This prognosis is consistent

with the financial ratio analysis presented in Chapter 4 of this report;

6. The deterioration in the MRCC’s financial sustainability assessment was characterised by

a combination of deteriorating Operating Results, deteriorating solvency, increasing

indebtedness, and poorer projected capital replacement performance;

7. An ‘Affordability v Revenue Raising Potential’ matrix was proposed as a way of

evaluating a local Council’s financial sustainability within the context of its own local

community – see Figure 3;

o An analysis of the G18 group of local Councils found that the MRCC’s local

community had the second lowest capacity to pay for local Council service

delivery (the Rural City of Swan Hill had the lowest) – with the ‘effective’ level of

Rates and Charges already at 4.07 % of median household income;

o The MRCC was ranked 12th within the G18 peer group of local Councils in terms of

the potential for future revenue growth;

o The MRCC was found to be located in ‘Quadrant 1’ – Low Affordability and Low

Potential for Revenue Growth – see Figure 3;

103

8. There are a number of implications stemming from being located in Quadrant 1,

including:

- The affordability of existing rates and charges is already an issue – being currently at

4.07 % of median household income, the MRCC’s rates and charges are the 2nd

highest within the G18 peer group;

- Future rate levy increases will further exacerbate this affordability issue and

therefore the MRCC should be seriously looking at capping future rate levy increases

to at a maximum CPI growth rate (2.5 % p.a.). If the MRCC was to do this, then over

time the relative affordability of the MRCC’s rates and charges compared to the G18

peer group will improve significantly given the normalized practise of annual rate

levy increases of 4.0 – 7.0 % across the Victorian local government sector;

- Due to low potential for revenue growth, there is a higher dependence upon rate

levy increases for revenue growth – highlighting the need to look to non-rate base

sources of revenue growth and options for reducing expenditure. Existing levels of

service delivery need to be assessed on the basis of community need as opposed to

the impact upon the MRCC’s organization or revenue base;

- The MRCC must look at reducing the current degree of subsidized service delivery

from the MRCC’s rate base – through increasing the degree of service provision on a

user-pays basis;

- Economic growth across the municipality must remain (as it currently is) a long-term

strategic priority of the MRCC.

9. The value of the Affordability v Revenue Raising Potential matrix become very clear

when the matrix was overlayed with each individual local Council’s financial

sustainability assessment.

- The above analysis demonstrates the value of the Affordability v Revenue Raising

Potential matrix as a tool for evaluating a local Council’s financial sustainability

104

within the context of its own local community (municipality). In particular,

Wodonga, Baw Baw and Geelong were each categorised as ‘high risk’ under the

author’s adjusted financial sustainability criteria, but it is clear that their future

prospects are varied due to their location in Quadrants 1, 2 and 4 respectively – see

Figure 5.

10. The analysis using the Affordability v Revenue Raising Potential matrix highlights the fact

that the assessment of a local Council’s financial sustainability should never be divorced

from local context;

11. In seeking to envision a financially sustainable local Council, it was found that common

characteristics of a financially sustainable local Council would include:

- Solvent - Being able to meet current and future expenditure obligations as and when

they fall due;

- Responsive - Being able to meet current and future community needs for local

Council service delivery;

- Sound risk management - to be able to adequately cope with unforeseen

circumstances which may impact materially upon expenditure and/or revenue

policies; and,

- Strategic - A long-term decision horizon.

12. A sustainable budget strategy was devised, consisting of 12 key principles:

a. The use of an extended budget forecast period of 7 years to provide greater insight

into the longer-term ramifications of budget decisions;

b. The use of cash-based revenue and expenditure forecasts – free of non-monetary

(‘book entry’) items, accrual and other adjustments;

c. The annual operating budget must be balanced after capital grants are taken into

account in the absence of non-monetary (‘book entry’) items, changes in effective

105

depreciation rates, new borrowings, and/or liquidation of assets (financial or non-

financial);

d. A sustainable budget strategy should incorporate an annual contingency fund

allocation equivalent to at least 1.0 % of total Operating Cash Inflows in addition to a

Minimum Operating Surplus requirement equivalent to 2.0 % of total Operating Cash

Inflows in order to position a local Council to be able to respond to significant

unforeseen expenditure commitments without having to resort to raising new debt

finance, and without having to make any significant changes to revenue or

expenditure policies;

e. A target-costing approach to budgeting is recommended as it requires a local Council

to fit proposed levels of service delivery within pre-determined budget parameters

rather than building a budget around desired levels of service delivery;

f. The annual growth rate in total expenditures must not exceed the average annual

growth rate in Underlying Revenue and/or total Operating Cash Inflows;

g. Keeping interest bearing debt levels below 20 % of Underlying Revenue less Capital

Grants, and debt terms to a maximum of 7.5 years in order to contain interest costs;

h. A capital investment program should be measured and kept within parameters that

do not necessitate excessive debt financing;

i. Annual depreciation allocations must be fully funded and sufficient to fund all capital

renewal / upgrade expenditures;

j. Annual rate levy increases should be capped at the lower of 2.5 % per annum or the

CPI growth rate in order to avoid ‘real’ incursions into a local community’s capacity

to pay for local Council service delivery;

106

k. User fees and charges should reflect full-cost recovery – care must be taken to

accurately assess the full-cost of all forms of service delivery and User fees and

charges need to then be set accordingly;

l. Capital grants should not be accepted where there is tangible evidence of cost-

shifting by other spheres of government (State or Federal).

All 12 key budget principles are consistent with the concept of financial sustainability.

13. A review of the MRCC’s financial performance during the 2007/08-2012/13 period and

projections contained in the MRCC’s Budget 2013/14 document reveals that the MRCC

has fallen short in relation to 11 of the 12 key budget principles noted above. In relation

to the 12th principle – ensuring that capital grants did not result in cost-shifting by other

spheres of government (State or Federal) to the MRCC – could not be determined on the

basis of publicly available data. It is the author’s assertion that the failure of the MRCC

to meet the 12 key principles noted above provides significant insight into why the

MRCC’s financial performance has been deteriorating, and why this deteriorating

financial performance is projected to continue throughout the budget forecast period in

the absence of any significant remedial intervention.

107

Table 1 – Proposed Adjusted Financial Sustainability Indicators

Indicator

Parameters

High Risk Medium Risk

Low Risk

1. Underlying Result - Adjusted [Underlying] Net Surplus /

Underlying Revenue - [(Underlying Surplus less Capital Grants) /

(Underlying Revenue less Capital Grants)]

< 0

< -10 %

0.0 – 5.0 %

-10 % - 0

> 5.0 %

> 0

2. Liquidity - Current Assets / Current Liabilities - Holdings of Cash and Cash Equivalents /

Rate Base

< 1.5

< 50 %

1.5 – 2.0

50 – 70 %

> 2.0

> 70 %

3. Self-financing - Net Cash Flow from Operations / Underlying

Revenue - Net Cash Flow / Underlying Revenue

< 20 % < 0 %

20 – 30 % 0 – 5 %

> 30 % > 5 %

4. Indebtedness - Total Liabilities / (Underlying Revenue less

Capital Grants) - Interest Bearing Debt / (Underlying

Revenue less Capital Grants)

> 55 %

> 27.5 %

40 – 55 %

20 – 27.5 %

< 40 %

< 20 %

5. Capital Replacement - Capital Expenditure (IPPE) / Depreciation

(IPPE) - Depreciation (IPPE) / Infrastructure,

Property, Plant and Equipment Assets (IPPE)

≤ 1.0

≤ 2.5 %

1.0 – 1.5

2.5 – 3.0 %

> 1.5

> 3.0 %

108

Figure 2 – Summary: Overall Financial Sustainability Assessment - MRCC (2007/08-2016/17)

Definition of Measure: Combined scores for Underlying Result, Liquidity, Self-financing, Indebtedness, and Capital Replacement using adjusted financial sustainability indicators. Benchmark for risk categories: Low Risk - ≥ 26; Medium Risk – 20-26; High Risk - < 20. MRCC Performance and Trend: MRCC assessed as ‘medium risk’ during 2007/08-2011/12 period. MRCC assessed as ‘high risk’ during 2012/13-2016/17 period. Clear evidence of a deteriorating trend across the 2007/08-2016/17 period. There was a significant deterioration in the MRCC’s financial sustainability during 2011/12-2012/13 with no real prospect of recovery during the budget forecast period based upon current budget forecasts as presented in the MRCC’s 2013/14 budget document.

24 24 22 22

23

18 19

18 19 19

0

5

10

15

20

25

30

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

109

Figure 3 – Affordability v Revenue Raising Potential Matrix

Local Council Financial Sustainability - Projecting forward

4.7

4.6

4.50 A

4.40 A Council A

4.30 B Council B

4.20 C Council C

4.10 D Council D

4.00 E Council E

3.90

3.80

3.70 B

3.60

3.50

3.40 Assessment - Strategic Financial Management

3.30 D

3.20 Rate Levy Non-Rate Subsidized User-pays Operating Assessed

3.10 Increases Base Income Services Services Expenditure Difficulty

3.00 C Council A Minimize Maximize Reduce Increase Reduce High

2.90 Council B Minimize Maximize Reduce Increase Reduce Mod-High

2.80 Council C Minimize Maximize Reduce Increase Reduce Mod-High

2.70 Council D Minimize Maximize Reduce Increase Reduce Moderate

2.60 Council E Minimize Maximize Reduce Increase Reduce Low

2.50

2.40 Assessed Difficulty - relative to other local Councils in different quadrants.

2.30 E

2.20

2.10

2.00

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Revenue Raising Potential

Legend:

Local Council Financial Sustainability: Affordability v Revenue Raising PotentialEx

isti

ng

Aff

ord

abil

ity

- R

ates

& C

har

ges

as p

erce

nta

ge o

f M

edia

n H

ou

seh

old

Inco

me

(%)

QUADRANT 1Low affordability &

Low potential for revenue

growth

QUADRANT 2Low affordability &

High potential for revenue

growth

QUADRANT 3High affordability &

Low potential for revenue

growth

QUADRANT 4High affordability &

High potential for revenue

growth

110

Figure 4 – Application of Affordability v Revenue Raising Potential Matrix


4.7

4.6

4.50 8

4.40 1 Ballarat

4.30 2 Bendigo

4.20 3 Geelong

4.10 4 Shepparton

4.00 7 5 Horsham

3.90 6 La Trobe

3.80 13 7 Mildura

3.70 5 11 18 8 Swan Hill

3.60 4,15 12 9 Wangaratta

3.50 9 1 10 Warrnambool

3.40 11 Wodonga

3.30 10 12 Baw Baw

3.20 6 13 Campaspe

3.10 14 Cardinia

3.00 15 East Gippsland

2.90 2 16 Macedon Ranges

2.80 3 17 Nillumbik

2.70 14 18 Wellington

2.60

2.50 16

2.40 17

2.30

2.20

2.10

2.00

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17


Legend:


isti

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ffor

dabi

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- Rat

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Cha

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as

perc

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f Med

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Hou

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com

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)

111

Figure 5 – Affordability v Revenue Raising Potential Matrix with Financial Sustainability Assessment overlay


4.7

4.6

4.50 8

4.40 1 Ballarat

4.30 2 Bendigo

4.20 3 Geelong

4.10 4 Shepparton

4.00 7 5 Horsham

3.90 6 La Trobe

3.80 13 7 Mildura

3.70 5 11 18 8 Swan Hill

3.60 4,15 12 9 Wangaratta

3.50 9 1 10 Warrnambool

3.40 11 Wodonga

3.30 10 12 Baw Baw

3.20 6 13 Campaspe

3.10 14 Cardinia

3.00 15 East Gippsland

2.90 2 16 Macedon Ranges

2.80 3 17 Nillumbik

2.70 14 18 Wellington

2.60

2.50 16

2.40 17

2.30

2.20 → High Risk

2.10 → Moderate Risk

2.00 → Low Risk

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

© L.F. O'Connor 2014.


Legend:


isti

ng A

ffor

dabi

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- Rat

es &

Cha

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as

perc

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f Med

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Hou

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)

Legend - Financial

Sustainability Assessment:

113

Summary of key findings – Chapter 8: A review of the MRCC’s debt strategy

with accompanying recommendations

Setting the context: Preliminary comments on the MRCC’s increasing indebtedness

The MRCC has had a somewhat chequered history when it comes to the use of debt.

Specifically, the MRCC has in the past and in more recent times used debt to fund non-

capital investment-related expenditures, and has on a number of occasions made use of

excessively long loan terms of up to 30 years. Indeed, the MRCC has stated in its last two

budget documents that ‘…all new borrowing will be on a principal and interest basis for a

20-30 year term’ (MRCC Budget 2012/13, Section 3, p.1; MRCC Budget 2013/14, p.22). The

use of excessively long loan terms is causing the MRCC’s estimated weighted average debt

portfolio term to blow out to in excess of 20 years and is resulting in a significant increase in

the cost impost upon the local community.

In addition, the MRCC has signalled its intent to keep borrowings at or near 40 per cent of

its rate base over the budget forecast period without disclosing any strategy for debt

reduction. Combined with clear evidence that the MRCC’s capacity to service debt has

deteriorated significantly during the past three years, and with no clear prospects of a turn-

around during the current budget forecast period, the underlying financial risk of the MRCC

has increased significantly and is going to have very real ramifications in terms of the

MRCC’s future capacity to respond to unforeseen circumstances and to invest in major

community infrastructure assets going forward.

The following graphs highlight the issues noted above.

115

Figure 1 – MRCC: Actual Level of Indebtedness (Total Liabilities & Interest Bearing Debt) (2007/08-2016/17) ($’000)

Actual and projected indebtedness (2007/08-2016/17):

Total Liabilities – The MRCC’s overall level of indebtedness has been consistently increasing since 2010/11. Projected Total Liabilities of $53.011 million in 2016/17 is 51.13 % higher than $35.077 million in 2007/08.

Interest Bearing Debt – The MRCC’s indebtedness as measured by outstanding Interest Bearing Debt has been consistently increasing since 2010/11. Projected Interest Bearing Debt of $26.304 million in 2016/17 is 59.05 % higher than $16.538 million in 2007/08.

$35,077 $36,750 $36,230

$32,797

$50,735

$47,271 $48,061 $48,097 $49,905

$53,011

$16,538 $18,075

$16,715 $15,286

$19,616

$23,133 $23,333 $22,735 $23,884 $26,304

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

TotalLiabilities

InterestBearingDebt

116

Figure 2 – MRCC: Actual & Projected Level of Indebtedness relative to Underlying Revenue less Capital Grants (2007/08-2016/17)

Commentary:

Relative to Underlying Revenue less Capital Grants, the MRCC’s level of indebtedness increased significantly during the 2010-2012/13 period and the data presented in the above graph indicates that the increased level of indebtedness has become the new ‘tolerable’ norm for the MRCC with no evidence of significant reduction throughout the budget forecast period.

43.87% 43.65% 44.70%

40.94%

56.51% 56.60% 55.12%

53.19% 52.70% 53.43%

20.68% 21.47% 20.62% 19.08%

21.85%

27.70% 26.76% 25.14% 25.22%

26.51%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

TotalLiabilities as%UnderlyingRevenueless CapitalGrants

InterestBearingDebt as % ofUnderlyingRevenueless CapitalGrants

117

Figure 3 – MRCC: Impact of Increasing Indebtedness upon actual / projected annual finance costs (2007/08-2016/17)

Commentary:

The significant increase in the MRCC’s interest bearing debt in 2011/12 (from $15.286 million to $19.616 million – an increase of $4.330 million) effectively increased the MRCC’s actual / projected annual finance costs by approximately $450 000 - $500 000. The major reason for the actual / projected annual finance costs remaining at a relatively consistent level during the 2012/13-2016/17 even though interest bearing debt is projected to increase to $26.304 million by 2016/17 during this period is due to the use of longer loan terms as indicated in successive MRCC Budget documents.

$1,084 $1,024 $1,135

$1,047 $970

$1,440 $1,564

$1,452 $1,460 $1,529

$1,574

$963

$1,360 $1,429 $1,270

$1,483 $1,648 $1,598

$1,851

$1,580

$2,658

$1,987

$2,495 $2,476

$2,240

$2,923

$3,212 $3,050

$3,311

$3,109

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

InterestCost

PrincipalRepayments

Total DebtServicingPayments

118

Figure 4 – MRCC: Estimated Weighted Average Debt Portfolio Term (Years) by year (2008/09-2016/17)

Commentary: Based upon both the estimated average debt portfolio term and estimated weighted average debt portfolio term, the MRCC’s estimated debt portfolio term (in years) is trending upwards – that is, the estimated average debt portfolio term is projected to get longer over the budget forecast period.

17.50 17.50 17.50

15.77 15.15

17.09

18.82

20.50 21.50

18.62 18.62 18.62 18.24 17.52 17.25

17.91

19.48 20.51

0.00

5.00

10.00

15.00

20.00

25.00

2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

EstimatedAverage DebtPortfolio Term(Years)

EstimatedWeightedAverage DebtPortfolio Term(Years)

119

Figure 5 – Underlying Surplus / Deficit less Capital Grants as percentage of Underlying Revenue less Capital Grants

Definition: Underlying Surplus / (Deficit) less Capital Grants / Underlying Revenue less Capital Grants. Interpretation: Underlying Surplus / (Deficit) less Capital Grants is the ‘true’ measure of a local Council’s capacity to service debt. Benchmark: 0.00. MRCC – Status (as at 30 June 2013): Deficit = -2.63 %. MRCC – Trend: Significant deterioration during 2007/08-2012/13. Projected to breakeven during budget forecast period. MRCC v Benchmark: Below benchmark in 4 of 6 years during 2009/10-2014/15 period. Significance: MRCC’s underlying performance has fundamentally deteriorated during 2007/08-2012/13 period. Projected performance during budget forecast period is breakeven with no room to move.

10.06%

6.62%

-0.19%

-2.22%

0.16%

-2.63%

0.38% -0.37%

0.07% 0.45%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Underlying Surplus /(Deficit) as %Underlying Revenue

Benchmark

120

Figure 6 – Net Cash Flow from Operations as percentage of Underlying Revenue

Definition: Net Cash Flow from Operations / Underlying Revenue. Interpretation: The higher the number, the better the performance. Benchmark: RRC Average (2007/08-2011/12) – 27.25 %. SSC Average (2007/08-2011/12) – 27.04 %. MRCC – Status (as at 30 June 2013): 21.94 % - below RRC and SSC peer group averages. MRCC – Trend: Consistent deterioration during 2007/08-2016/17 period. Significant deterioration during budget forecast period. MRCC v Benchmark: Below benchmark in 8 of 10 years during 2007/08-2016/17 period. Significance: MRCC’s Net Cash Flow from Operations has been exhibiting a deteriorating trend throughout the 2007/08-2012/13 period. This is projected to deteriorate further during budget forecast period.

26.70% 26.78% 26.16% 25.27%

34.93%

21.94%

26.73%

21.97% 21.08% 20.79%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

NCF from Operationsas percentageUnderlying Revenue

RRC Average(2007/08-2011/12)

SSC Average (2007/08-2011/12)

121

Figure 7 – Net Cash Flow as percentage of Underlying Revenue

Definition: Net Cash Flow from Operations / Underlying Revenue. Interpretation: The higher the number, the better the performance. Benchmark: RRC Average (2007/08-2011/12) – 2.60 %. SSC Average (2007/08-2011/12) – 1.45 % %. MRCC – Status (as at 30 June 2013): 4.61 % - above RRC and SSC peer group averages. MRCC – Trend: Consistent deterioration during 2007/08-2016/17 period. Significant deterioration during budget forecast period. MRCC v Benchmark: Below RRC benchmark in 8 of 10 years during 2007/08-2016/17 period. Below SSC benchmark in 7 of 10 years during 2007/08-2016/17 period. Significance: MRCC’s Net Cash Flow from Operations has been exhibiting a deteriorating trend throughout the 2007/08-2012/13 period. Poor Net Cash Flows projected to deteriorate further during budget forecast period.

2.82% 3.91%

1.36%

-4.78%

1.54%

4.61%

-11.44%

0.37% 0.37% 0.37%

-14.00%

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

NCF as percentageUnderlying Revenue

RRC Average(2007/08-2011/12)

SSC Average (2007/08-2011/12)

122

Figure 8 – Current Ratio

Definition: Current Assets divided by Current Liabilities. Interpretation: Prima facie indicator of capacity to meet short-term financial obligations. Benchmark: RRC Average (2007/08-2011/12) – 2.24. SSC Average (2007/08-2011/12) – 2.42. Auditor General’s ‘High Risk’ benchmark – 1.0. MRCC – Status (as at 30 June 2013): 1.73 – Significantly below RRC and SSC peer group averages. NOTE: Current Ratio at 30 June 2013 would be 1.22 if $4.0 loan on 28 June 2013 & bringing forward of $6.05 million in VCG funding from 2013/14 are excluded from the analysis. MRCC – Trend: Consistent and significant deterioration during 2007/08-2016/17 period. During budget forecast period MRCC’s Current Ratio is only marginally above the Auditor General’s ‘High Risk’ benchmark of 1.0. MRCC v Benchmark: Below RRC and SSC benchmarks in 8 of 10 years during 2007/08-2016/17 period. Significance: MRCC’s liquidity has been deteriorating significantly throughout the 2007/08-2012/13 period.

2.43 2.53

1.64 1.76

1.38

1.73

1.07 1.08 1.08 1.10

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Current Ratio

RRC Average(2007/08-2011/12)

SSC Average (2007/08-2011/12)

Auditor General - HighRisk Benchmark

123

Figure 9 – Holdings of Cash and Cash Equivalents as percentage of Rate Base

Definition: Total Cash and Cash Equivalents divided by Rate Base. Interpretation: Prima facie indicator of capacity to meet short-term financial obligations. Benchmark: RRC Average (2007/08-2011/12) – 70.09 %. SSC Average (2007/08-2011/12) – 64.85 %. MRCC – Status (as at 30 June 2013): 54.83 % – Below RRC and SSC peer group averages. MRCC – Status (as at 30 June 2013): If bringing forward of $6.05 million VGC funds from 2013/14 is excluded from the analysis = 42.35 % – Significantly below RRC and SSC peer group averages. MRCC – Trend: Consistent and significant deterioration during 2011/12-2016/17 period. MRCC v Benchmark: Below RRC and SSC benchmarks in 8 of 10 years during 2007/08-2016/17 period. Significance: MRCC’s liquidity has been deteriorating significantly throughout the 2007/08-2012/13 period.

62.35%

66.88%

60.03% 56.77%

72.44%

54.83%

29.41% 28.69% 27.66% 26.68%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Holdings of Cash &Cash Equivalents as %Rate Base

RRC Average(2007/08-2011/12)

SSC Average (2007/08-2011/12)

125

Summary of key findings

1. The use of debt as a part of an organization’s financing strategy within the Local

Government sector is distinguished from the private sector in at least three ways:

The aim of a financing strategy is to maximise value for money for the local

community;

Many assets financed by debt within the Local Government sector do not generate

economic returns, and therefore debt cannot be justified on the basis that it is being

used to fund capital investment;

The absence of economic returns being generated from assets being financed by

debt means that the use of debt finance creates obligations to service debt from on-

going operating budgets;

The level of debt that a local Council should carry depends upon a range of factors

including existing levels of debt, current and projected Net Cash Flows, the

underlying Capital Improved Value base for the municipality;

There are three factors which contribute to the overall cost of debt: (i) the amount

of debt outstanding; (ii) the average term of debt; and (iii) the average interest rate;

The use of debt on the basis of ‘inter-generational equity’ (that is, that future

generations should contribute to the cost of current infrastructure investments) is

contrary to any notion of prudent financial management as it inevitably involves the

use of longer loan terms and thereby increases the total cost of infrastructure assets;

and,

A set of 12 guidelines for a financially prudent debt policy were proposed – these

guidelines are summarised in Table 8.1.

126

Table 8.1 – Preliminary guidelines for a financially prudent debt policy

(i) A ban on the use of debt to fund ongoing operating activities except where there are

genuine and unforeseen working capital deficiencies. In such cases, short-term

bridging finance may be used for a period not exceeding 12 months;

(ii) Debt must never be used as a means of achieving financial sustainability indicator

targets (for example, the Current Ratio);

(iii) The use of short-term bridging finance can be minimized through creating a

contingency fund to which annual allocations from the operating budget are made

to create a reserve for unforeseen but necessary expenditures;

(iv) Given that debt is primarily used as a funding source for non-income generating

capital investment, minimising the cost of debt must be a primary objective;

(v) The actual size of debt should be kept to a minimum through ensuring that annual

depreciation allocations create sufficient reserves to fund all asset renewal and

maintenance expenditures;

(vi) The annual capital investment expenditure budget is smoothed over a number of

years in order to reduce the size of new borrowings that may be required to meet

‘chunky’ expenditures typically associated with capital expenditure;

127

Table 8.1 – Preliminary guidelines for a financially prudent debt policy (Con’t)

(vii) Debt terms should be kept within a 5-7.5 year range, with an absolute maximum

10-year debt term where circumstances warrant the use of a longer debt term;

(viii) The decision to use fixed or variable interest rate loans should be made on the

basis of minimising the overall cost of a loan over the life of the loan;

(ix) ‘Interest only’ repayment periods must be avoided – ‘interest only’ periods add to a

loan’s term and increases the total cost of debt finance over the life of the loan;

(x) In years when there is an operating surplus, surplus monies must be transferred to a

reserve to fund future capital expenditure programs rather than used for funding an

expansion in annual service delivery;

(xi) In years when capital and/or operating grant funding allocations are received in

advance (for example, grant allocations for the year 20X1-X2 being received in

May/June 20X1), the monies received in advance must be set aside in a reserve and

not be used to fund operating activities relating to the current year. This measure is

aimed at ensuring that annual service delivery levels are funded from revenue being

generated and/or received during the same financial year; and,

(xii)Debt financing can never be justified on the basis of ‘inter-generational equity’ or

similar notions that supposedly attempt to allocate the cost of capital investments

over an extended period of time in order that future users also contribute to the cost

of the capital investment. Such notions are financially imprudent as it inevitably

leads to longer-term loan periods being negotiated which increases the total cost of

assets being created.

128

2. The MRCC’s debt policy appears to consist of three ‘pillars’:

Keeping debt levels within 40-45 % of rate revenue;

Using loan terms of 20-30 years;

Using debt as a funding source for capital works programs.

It was found that the policy of keeping debt levels within 40-45 % of rate revenue

ignored the changing composition of the MRCC’s Underlying Revenue, thus enabling

an effective increase in debt by up to 27 % without breaching the 40-45 % of rate

revenue rule;

The MRCC’s signalled intent to keep debt levels at or near 40 % of Rate Base over the

budget forecast period is an anomaly within the G18 peer group of local Councils;

The use of loan terms of 20-30 years is an anomaly within the G18 peer group and is

adding significantly to the cost of the MRCC’s on-going operations;

As noted in Point 1 – debt can never be justified in the basis that it is being used to

fund capital works; and,

There is evidence to suggest that the MRCC’s actual practice in relation to the use of

debt is contrary to the debt policy espoused by the MRCC in relation to loan terms

and the purpose for which debt has been used.

3. There is clear evidence that the MRCC is making use of long-term loans that is resulting

in an increase in the MRCC’s weighted average debt portfolio term and is resulting in

significant and avoidable interest costs being incurred by the MRCC. Specifically;

The estimated average term of the MRCC’s debt portfolio has increased significantly

post-2010/11 and is projected to continue to increase throughout the budget

forecast period (2013/14-2016/17);

The MRCC’s estimated average loan term (projected to be 16.65 years in 2016/17) is

significantly higher than the G18 peer group average (projected to be 8.68 years in

2016/17).

129

4. The cost of debt finance increases significantly as a loan term is increased beyond 5-10

years. Specifically:

A loan taken over 30 years will result in total interest costs equivalent to 3.23 times

the interest costs of an equivalent loan taken over 10 years;

A loan taken over 20 years will result in total interest costs equivalent to 2.07 times

the interest costs of an equivalent loan taken over 10 years;

Two loans raised by the MRCC in 2003/04 amounting to $6.5 million and taken over

30 years is going to cost the Mildura community an additional $6.25 million in

interest costs compared to a scenario whereby both loans were taken over 10 years;

The MRCC’s representations which have sought to justify increased indebtedness on

the basis of ‘taking advantage of low interest rates’ are false on two counts: (i)

savings resulting from low interest rates are being off-set by the use of excessively

long loan terms; and (ii) not all loans raised by the MRCC during the past 2 years

have been negotiated at ‘low interest rates.’ For example, a $1.0 million loan was

raised by the MRCC in September 2012 which was taken over 30 years at an interest

rate of 7.4 %, which is significantly above any notion of ‘low interest rates’.

Specifically, the MRCC’s weighted average interest rate on outstanding debt as at 30

June 2013 was 6.22 %, and the MRCC negotiated a 12-month $1.0 million loan in

October 2013 for an interest rate of 3.29 %.

5. The MRCC’s use of excessive loan terms is creating a false sense of affordability and is

effectively obscuring the true cost of debt from the local community. In particular, the

MRCC has failed to disclose in their 2013/14 Budget document any explanation of the

consequences (increased costs) of using longer-term loan facilities even though the use

of longer-term loan facilities is resulting in a material increase in the MRCC’s total

interest costs and increasing the real cost of ongoing operations of the MRCC.

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6. Reducing loan terms is the key to reducing the MRCC’s cost of increasing indebtedness;

If the MRCC was to reduce the term of its $23.133 million debt portfolio as at 30

June 2013 to 10 years, projected interest savings will be in the order of $18.4 million

(based upon the MRCC’s Weighted Average Interest Rate of 6.22 % as at 30 June

2013);

If the MRCC was to reduce the term of its $23.133 million debt portfolio as at 30

June 2013 to 7.5 years, projected interest savings will be in the order of $20.5 million

(based upon the MRCC’s Weighted Average Interest Rate of 6.22 % as at 30 June

2013) – see Table 8.2.

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Figure 8.2 – Summary of alternative debt strategy scenarios

A. SUMMARY – Repayment of existing debt as at 30 June 2013 - $23.133 million over ‘X’ years @ 6.22 % ($’000)

Annual Repayments

Total Interest Cost

Projected Interest Savings

Projected debt – 30 June 2017

Existing strategy $3 171 $27 0621 $26 304

Proposed strategy:2

5 years $5 525 $4 490 $22 572 $5 201

7.5 years $3 953 $6 543 $20 519 $12 099

10 years $3 176 $8 626 $18 436 $15 509 1 Based upon current projected repayments for 2013/14-2016/17 (MRCC Budget 2013/14, p.54) + repayment of $26 304 million over 20 years @ 6.22 % with no new borrowings. 2 Proposed strategy includes moratorium on new borrowings until existing debt is repaid in full.

B. SUMMARY – Repayment of existing debt as at 30 June 2013 - $23.133 million over ‘X’ years @ 5.50 % ($’000)

Annual Repayments

Total Interest Cost




Proposed strategy:2

5 years $5 417 $3 953 23 109 $5 135

7.5 years $3 847 $5 746 21 316 $11 953

10 years $3 069 $7 557 19 505 $15 331 1 Based upon current projected repayments for 2013/14-2016/17 (MRCC Budget 2013/14, p.54) + repayment of $26 304 million over 20 years @ 6.22 % with no new borrowings. 2 Proposed strategy includes moratorium on new borrowings until existing debt is repaid in full.

C. SUMMARY – Repayment of existing debt as at 30 June 2013 - $23.133 million over ‘X’ years @ 7.00 % ($’000)

Annual Repayments

Total Interest Cost




Proposed strategy:2

5 years $5 642 $5 077 $21 985 $5 273

7.5 years $4 069 $7 419 $19 643 $12 257

10 years $3 294 $9 803 $17 259 $15 699 1 Based upon current projected repayments for 2013/14-2016/17 (MRCC Budget 2013/14, p.54) + repayment of $26 304 million over 20 years @ 6.22 % with no new borrowings. 2 Proposed strategy includes moratorium on new borrowings until existing debt is repaid in full.

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7. Two key strategies that will be effective in breaking the MRCC’s trend of increasing

indebtedness include:

The introduction of a moratorium on new borrowings from 2013/14 to be kept in

place for at least the budget forecast period (2013/14-2016/17);

Increasing the ‘Principal v Interest’ payment differential (that is, keeping annual debt

servicing payments at a level that ensures a material excess of principal reduction

compared to annual interest charges); and,

The need for the MRCC to take action in regard to the MRCC’s projected increasing

indebtedness is significant given the size of projected savings that can be achieved:

Scenario 1: The simultaneous introduction of a moratorium on new borrowings from

2013/14 and a commitment to reduce the MRCC’s debt portfolio term to 10 years

will result in projected interest savings of $17.765 million, and reduce the projected

level of outstanding debt as at 30 June 2017 by $10.795 million from the MRCC’s

current budget projection of $26.304 million to $15.509 million.

Scenario 2: The simultaneous introduction of a moratorium on new borrowings from

2013/14 and a commitment to reduce the MRCC’s debt portfolio term to 7.5 years

will result in projected interest savings of $19.876 million, and reduce the projected

level of outstanding debt as at 30 June 2017 by $14.205 million from the MRCC’s

current budget projection of $26.304 million to $12.099 million.

Scenario 3: If the MRCC was to increase its debt servicing payments by $1.5 million

per annum to an average of $4.671 million per annum, the MRCC’s projected

outstanding debt as at 30 June 2017 will be reduced by $6.305 million, and total

projected interest savings would be in the vicinity of $16.9 million.

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8. Given the MRCC’s current and projected operating results and Net Cash Flow projections

as presented in the 2013/14 budget document, the MRCC faces a very real risk of on-

going normalized reliance upon debt to fund operating budget shortfalls. Such a

scenario will result in a continuation of the already established trend of increasing

annual costs associated with servicing increased indebtedness with clear implications for

on-going operating budgets.

9. Whether the MRCC should use fixed or variable interest rate loans is a decision that can

only be made when a new loan is being negotiated and will depend upon the most cost

effective options available at that time. By far the biggest issue being faced by the

MRCC is the use of longer-term loan periods which is resulting in a significant interest

cost impost being incurred by the MRCC.

For example, in October 2013 the MRCC negotiated a $1.0 million over 12 months at

a variable interest rate of 3.29 %, which will result in a total projected interest cost of

$0.329 million.

In September 2012 the MRCC also negotiated a $1.0 million loan – but in this second

instance the loan term was 30 years and the interest rate negotiated was 7.4 %. The

total interest cost of this second loan is projected to be $1.515 million, 4.6 times the

total interest cost of the first-mentioned loan.

10. The MRCC’s signalled intent to keep debt at or near 40 % of Rate Base will allow for the

MRCC to effectively increase its level of indebtedness by over 27 % over the budget

forecast period without breaching the ’40 % of Rate Base’ parameter due to the

projected change in the MRCC’s Underlying Revenue composition. Unlike a number of

other local Councils in the G18 peer group, the MRCC’s 2013/14 Budget document

provides no detail on how the MRCC intends to neither manage its increasing

indebtedness nor how and over what time period it is going to be reduced.

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11. The MRCC’s response to concerns raised about the MRCC’s increasing indebtedness has

been inadequate and lacking in sufficient detail to allow the Mildura community to make

an informed evaluation of the situation that is unfolding.

12. The underlying financial risk of the MRCC is increasing principally due to increasing

indebtedness at a time when projected operating results, Net Cash Flows and holdings

of cash reserves are deteriorating, and the MRCC’s Rate Base dependency is projected to

increase significantly. As a result, the MRCC’s current debt strategy is going to

contribute to on-gong pressure for the MRCC to increase rates by at least 5.0 % per

annum into the foreseeable future as the MRCC’s annual debt servicing obligations

increase – see Figure 8.3. This is a significant concern given that the average level of

rates imposed by the MRCC are already the highest within the G18 peer group at

0.007304 cents per $1 CIV compared to the average for the G18 peer group of 0.004545

cents per $1 CIV.

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Figure 8.3 – MRCC: Annual Debt Servicing Commitments ($’000)

13. The MRCC’s exhibited propensity to maintain overall debt levels at or near 40 % of Rate

Base – which effectively results in the level of MRCC’s interest bearing debt increasing in

line with growth in the MRCC’s Rate Base – is at odds with many other local Councils

who are exhibiting a clear intent to reduce levels of indebtedness in spite of increases in

their capacity to service increased levels of debt.

A comparison of the MRCC with 13 other local Councils included in the G18 peer group

revealed that 6 have debt levels averaging at or near 40 % of Rate Base (Mildura,

Cardinia, Warrnambool, Ballarat, Wangaratta, and Wodonga). Of these 6, 4 have an

exhibited intent to reduce debt by an average of 21.50 % over the budget forecast

$2,658

$1,987

$2,495 $2,476

$2,240

$2,923

$3,212

$3,050

$3,311

$3,109

$1,574

$963

$1,360 $1,429

$1,270

$1,483

$1,648 $1,598

$1,851

$1,580

$1,084 $1,024

$1,135 $1,047

$970

$1,440 $1,564

$1,452 $1,460 $1,529

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Total Debt Servicing Payments Principal Repayments

Interest Payments

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period (2013/14-2016/17). Mildura (marginal decrease of 4.31 %) and Wangaratta

(increase of 13.24 %) appear to be anomalies on this basis.

14. The MRCC has consistently claimed that debt is used to fund its capital works program –

which is the formal policy as stated in the MRCC’s Strategic Resource Plan 2013/14-

2016/17.

Two points need to be highlighted in relation to this stated policy position:

Due to the of economic returns, it is inappropriate to justify debt on the basis of

‘funding capital investment’ within the Local Government sector; and,

During 2012/13 a $4.0 million loan was raised over 10 years in order to fund working

capital due to a failure on the part of the MRCC to make adequate provision for its

Defined Benefits Plan Superannuation Special Call liability.

15. The MRCC’s interest rate risk exposure has increased in line with its increasing

indebtedness, but due to a failure on the part of the MRCC to disclose its debt portfolio

in the 2013/14 budget document, the exact size of this interest rate risk exposure

cannot be determined. The author estimates that for every 0.25 % increase in the

MRCC’s weighted average interest rate on outstanding debt, the MRCC’s annual debt

servicing costs will increase by approximately $57 500 (based upon an outstanding debt

balance of $23 million).

16. The MRCC’s increasing indebtedness is having an increasing impact upon annual

operating budgets as annual debt serving payments increase. The annual interest costs

associated with the MRCC’s outstanding debt as increased from an average of

approximately $1.05 million per annum during 2007/08-2011/12 to $1.489 million per

annum during 2012/13-2016/17 (actual and projected period), an increase of 41.8 % -

see Figure 8.3.

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17. There has been a significant reduction in the degree of transparency in relation to the

MRCC’s debt policy in successive budget documents during the 2007/08-2012/13 period.

In the 2008/09 and 2009/10 budget documents, the MRCC disclosed the entire

outstanding debt portfolio – individual loans, interest rate, loan term and other loan-

specific details. The MRCC’s 2010/11, 2011/12, 2012/13 and 2013/14 budget

documents contain no such disclosures. This lack of disclosure severely limits the local

community’s capacity to make an informed assessment of the MRCC’s practices in

relation to the use of debt.

The MRCC’s general level of disclosure in relation to its use and management of debt is

significantly less detailed than many other local Councils within the G18 peer group.

18. A comparative analysis of the MRCC’s indebtedness was undertaken against the

Regional and Rural Cities peer group of local Councils, and a Similar Size Council peer

group. The key findings of this comparative analysis were:

In relation to the Regional and Rural Cities (RRC) peer group: Depending upon the

measure used, the MRCC is the 2nd or 3rd most indebted Council within the RRC peer

group. There has been significant growth in both Total Liabilities (44.64 %) and

Interest Bearing Debt (18.62 %) during the 2007/08-2011/12 period, growing at an

average annual rate of 9.93 % and 3.72 % respectively during the 2007/08-2011/12.

Although the MRCC’s Interest Bearing Debt as of 30 June 2012 was still 40.25 % of

the MRCC’s Rate Base, and therefore classified as ‘low risk’ based upon Victorian

Auditor General’s guidelines (40% is the benchmark), the clear trend of increasing

indebtedness at a time when the RRC peer group’s level of indebtedness relative to

both Underlying Revenue and Rate Base is decreasing is a concerning observation.

This concern is heightened due to the fact that the MRCC’s capacity to meet annual

borrowing costs associated with Interest Bearing Debt – as measured by both

Underlying Surplus less Capital Grants to Borrowing Costs Multiple and Net Cash

Flow to Borrowing Costs Multiple - has been declining during the 2007/08-2011/12

period.

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In relation to the Similar Size Council (SSC) peer group: Depending upon the

measure used, the MRCC is between the 2nd and 4th most indebted Council within

the SSC peer group. There has been significant growth in both Total Liabilities and

Interest Bearing Debt during the 2007/08-2011/12 period, growing at an average

annual rate of 9.93 % and 3.72 % respectively during the 2007/08-2011/12.

Although the MRCC’s Interest Bearing Debt as of 30 June 2012 was still 40.25 % of

Rate Base, and therefore classified as ‘low risk’ based upon Victorian Auditor

General’s guidelines, the clear trend of increasing indebtedness at a time when the

SSC peer group’s level of indebtedness relative to both Underlying Revenue and Rate

Base is decreasing is a concerning observation.

This concern is heightened due to the fact that the MRCC’s capacity to meet annual

borrowing costs associated with Interest Bearing Debt has been declining during the

2007/08-2011/12 period.

19. A comparative analysis of the MRCC’s outstanding debt as at 30 June 2013 against the

G18 peer group of local Councils (which includes the Regional and Rural Cities (RRC) and

Similar Size Council (SSC) peers groups) revealed the following:

The MRCC’s percentage of interest bearing debt that was classified as ‘greater than 5

years’ was 60.63 %, compared to the G18 peer group average of 42.56 %;

The MRCC’s average effective interest rate was 6.24 %, compared to the G18 peer

group average of 7.01 %;

The MRCC’s annual debt servicing payments were only 12.64 % of total interest

bearing debt, compared to the G18 peer group average of 24.97 %;

The MRCC’s estimated time to repay outstanding interest bearing debt based upon

repayments made during 2012/13 and no new borrowings was 15.6 years, compared

to the G18 peer group average of 8.88 years.

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20. A comparative analysis of the MRCC’s debt strategy as disclosed in the 2013/14 Budget

document against the G18 peer group of local Councils for the 2013/14-2016/17 budget

forecast period revealed the following:

The MRCC’s Underlying Revenue growth rate is projected to be -1.66 %, compared to

the G18 peer group average of 2.89 %;

The MRCC’s indebtedness is projected to increase to 26.5 % of Underlying Revenue

less Capital Grants, significantly higher than the G18 peer group average of 21.28 %;

The MRCC’s projected capital expenditure program will average 27.7 % of Underlying

Revenue, compared to the G18 peer group average of 29.6 %.

In other words, the MRCC is projected to increase its indebtedness at a time when

Underlying Revenue is projected to contract and the MRCC’s projected capital works

program is less than the G18 peer group average.

Although the MRCC’s estimated average effective interest rate on outstanding debt

is expected to be 6.36 % compared to the G18 peer group average of 6.81 %, the use

of significantly longer loan terms by the MRCC (projected average - 14.4 years)

compared to the G18 peer group average (projected average - 8.91 years) is resulting

in an estimated cost per $1.0 million of debt for the MRCC being $556 000 per

annum, 45.9 % higher than the G18 peer group average of $381 000.

21. An analysis of the MRCC’s current budget projections extended beyond 2016/17 reveals

a very real likelihood that the MRCC’s outstanding debt will balloon to over $29 million

by 2019/20 if there is no significant change in the MRCC’s current financial strategy and

current revenue and expenditure growth rates do not change.

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Key recommendations in relation to the MRCC’s debt strategy

There are seven (7) key recommendations arising from the key findings presented in this

Chapter.

1. It is recommended that the MRCC adopt a formal debt policy that incorporates the

following key features:

(i) A ban on the use of debt to fund ongoing operating activities except where there are

genuine and unforeseen working capital deficiencies. In such cases, short-term bridging

finance may be used for a period not exceeding 12 months;

(ii) Debt must never be used as a means of achieving financial sustainability indicator

targets (for example, the Current Ratio);

(iii) The use of short-term bridging finance can be minimized through creating a contingency

fund to which annual allocations from the operating budget are made to create a

reserve for unforeseen but necessary expenditures;

(iv) Given that debt is primarily used as a funding source for non-income generating capital

investment, minimising the cost of debt must be a primary objective;

(v) The actual size of debt should be kept to a minimum through ensuring that annual

depreciation allocations create sufficient reserves to fund all asset renewal and

maintenance expenditures;

(vi) The annual capital investment expenditure budget is smoothed over a number of years

in order to reduce the size of new borrowings that may be required to meet ‘chunky’

expenditures typically associated with capital expenditure;

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(vii) Debt terms should be kept within a 5-7.5 year range, with an absolute maximum 10-

year debt term where circumstances warrant the use of a longer debt term;

(viii) The decision to use fixed or variable interest rate loans should be made on the basis

of minimising the overall cost of a loan over the life of the loan;

(ix) ‘Interest only’ repayment periods must be avoided – ‘interest only’ periods add to a

loan’s term and increases the total cost of debt finance over the life of the loan;

(x) In years when there is an operating surplus, surplus monies must be transferred to a

reserve to fund future capital expenditure programs rather than used for funding an

expansion in annual service delivery;

(xi) In years when capital and/or operating grant funding allocations are received in advance

(for example, grant allocations for the year 20X1-X2 being received in May/June 20X1),

the monies received in advance must be set aside in a reserve and not be used to fund

operating activities relating to the current year. This measure is aimed at ensuring that

annual service delivery levels are funded from revenue being generated and/or received

during the same financial year; and,

(xii)Debt financing can never be justified on the basis of ‘inter-generational equity’ or similar

notions that supposedly attempt to allocate the cost of capital investments over an

extended period of time in order that future users also contribute to the cost of the

capital investment. Such notions are financially imprudent as it inevitably leads to

longer-term loan periods being negotiated which increases the total cost of assets being

created.

2. Compliance with the debt policy suggested in Recommendation 1 (above) must be

mandatory with any proposed deviation from the policy requiring a report to the

MRCC’s elected Councillors which clearly outlines the reasons for the proposed

deviation from policy and associated financial implications. It is recommended that any

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proposed deviation from the MRCC’s debt policy require at least a two-thirds majority

vote of elected Councillors before approval is granted for the proposed deviation.

3. The MRCC must introduce an indefinite moratorium on new borrowings commencing

from 2013/14.

4. The MRCC’s outstanding debt of $23.133 million as at 30 June 2013 must be re-financed

and consolidated into a single loan to be repaid over a maximum loan term of 7.5 years.

This will result in real savings in interest costs accruing to the MRCC in the vicinity of

$20.519 million.

5. The MRCC’s current policy of using ’40-45 % of Rate Base’ as a guideline for ‘low-risk’

debt level must be replaced with a guideline based upon Underlying Revenue less

Capital Grants which is a preferred measure of a local Council’s capacity to service debt

due to the exclusion of non-monetary (’book entry’) items can capital grants.

6. The maximum debt parameter for indebtedness equivalent to 20 % of Underlying

Revenue less Capital Grants should be introduced.

7. The MRCC must increase its disclosures in relation to the use and management of debt.

Specifically, future budget documents must contain the following minimum disclosures:

A review of the MRCC’s historical indebtedness relative to Rate Base and

Underlying Revenue less Capital Grants;

A clear statement of debt strategy that addresses (i) the purposes of which debt is

used; and (ii) a clear strategy for debt reduction;

Financial projections which clearly show the MRCC’s projected level of

indebtedness over a minimum 5-year forecast period;

A complete loan portfolio detailing (i) individual loans and terms under which each

individual loan was negotiated; and (ii) the total projected interest cost associated

with each individual loan so as to enable the local community to make a clear

evaluation of the MRCC’s compliance with stated debt policy;

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Summary of key findings – Chapter 9: Developing a risk profile for the MRCC’s

2013/14 budget projections

The MRCC’s major areas of risk exposure are summarised below:

Areas of greatest risk exposure:

Changes in projected Underlying Revenue: A 1.0 % change in projected Underlying

Revenue will have a corresponding impact upon annual Operating Surplus / (Deficit) and

Net Cash Flow figures in the order of $1 million. Given the ‘thin’ projected annual

operating results and Net Cash Flow figures in MRCC’s Budget 2013/14, a 1.0 %

reduction in projected Underlying Revenue will result in Operating Deficits and Net Cash

Flow deficits throughout the budget forecast period.

Consider the following scenarios:

o If actual Underlying Revenue falls short of Underlying Revenue projections by as

little as 1.0 %, projected Operating Results and Net Cash Flows will be reduced by

between $936 000 - $1.025 million per annum during the budget forecast period;

o This will result in the MRCC’s projected Net Cash Flows being in perpetual deficits

of between $586 000 - $6.695 million throughout the budget forecast period.

o If actual Underlying Revenue falls short of Underlying Revenue projections by 2.0

%, projected Operating Results and Net Cash Flows will be reduced by between

$1.873 - $2.049 million per annum during the budget forecast period;


of between $1.523 - $7.719 million throughout the budget forecast period.

Changes in projected core operating costs and/or Total Expenses: A 1.0 % change in

projected Core Operating Costs and/or Total Expenses will have an impact upon annual

Operating Surplus / (Deficit) and Net Cash Flow figures in the order of $800 000 - $1

million over the budget forecast period. Given the ‘thin’ projected operating results and

Net Cash Flow figures in MRCC’s Budget 2013/14, a 1.0 % increase in projected Core

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Operating Costs and/or Total Expenses will result in Operating Deficits and Net Cash

Flow deficits throughout the budget forecast period.

In relation to Core Operating Costs, consider the following scenarios:

o If actual Core Operating Costs exceed Core Operating Cost projections by as little

as 1.0 %, projected Operating Results and Net Cash Flows will be reduced by

between $843 000 – 958 000 per annum during the budget forecast period;



o If actual Core Operating Costs exceed Core Operating Cost projections by 2.0 %,

projected Operating Results and Net Cash Flows will be reduced by between

$1.685 - $1.916 million per annum during the budget forecast period;



In relation to Total Expenses, consider the following scenarios:

o If actual Total Expenses exceed Total Expenses projections by as little as 1.0 %,


$869 000 – 988 000 per annum during the budget forecast period;



o If actual Total Expenses exceed Total Expenses projections by 2.0 %, projected

Operating Results and Net Cash Flows will be reduced by between $1.737 -

$1.975 million per annum during the budget forecast period;



Removal of Capital Grant funding with 20 % cost shifting or more: The removal of

Capital Grant funding with 20 % cost shifting will result in Operating Deficits and Net

Cash Flow deficits throughout the budget forecast period. This result highlights the

dependency that the MRCC has upon Capital Grants in order to achieve an Operating

Surplus and positive Net Cash Flow.

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Consider the following scenarios:

o If Capital Grants are removed from the analysis and the MRCC has engaged in

cost shifting into Capital Grants equivalent to 20 % of Capital Grants received,


$444 000 - $3.053 million per annum during the budget forecast period;



o If Capital Grants are removed from the analysis and no corresponding

adjustments are made to the MRCC’s expenditures, projected Operating Results

and Net Cash Flows will be reduced by between $2.221 – 15.266 million per

annum during the budget forecast period;



Area of lowest identified risk exposure:

Interest rate risk: Although the MRCC’s interest rate risk exposure will increase over the

budget forecast period as a result of increasing indebtedness, the need to borrow a further

$10 million in new loans during the budget forecast period in addition to any other loan re-

financing, a movement in interest rates of 25 basis points (that is, 0.25 %) will translate into

a budget impact of less than $100 000 per annum or less.

For example, if the MRCC’s Weighted Average Interest Rate was to increase by 0.25 %,

projected Operating Results and Net Cash Flows will be reduced by up to $58 000 – $66 000

per annum during the budget forecast period (depending upon how much new interest

bearing debt is accessed and how much existing interest bearing debt is re-financed).

Caveat on findings presented in this chapter: The other significant point that must be kept

in mind in relation to the above key findings is the fact that the MRCC is projected to be in a

fundamentally less sound financial position at the beginning of the 2013/14 year, and

throughout the 2013/14-2016/17 budget forecast period, compared to the Council’s

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financial position during the 2007/08-2010/11 period. Deteriorating underlying operating

results and net cash flows during the 2010/11-2012/13 period combined with projected

stagnating Headline Revenue growth, projected increases in operating costs, and projected

increasing indebtedness during the 2013/14-2016/17 period will create significant solvency

problems in the absence of direct and significant actions to ameliorate these projected

developments.

This means that the MRCC’s capacity to tolerate or ‘absorb’ poor financial results will be

significantly eroded over the budget forecast period. In short, there is not much room for

error in-so-far as budget projections are concerned. The scenario analysis presented in this

chapter clearly supports this view.

A summary of the key insights from each area of scenario analysis examined is presented in

Tables 9.1 and 9.2.

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Table 9.1 - Summary of Scenarios Considered Major Scenarios Sub-Scenarios1 Comments – significance of each area of analysis:

A. Impact of change in CIV – Farming Properties (Scenarios 1.1-1.12)

Variations in CIV – Farming Properties ranging from +15 % through to – 15 % and the likely impact this will have on MRCC’s Rate Base and the resulting impact upon Operating Results (Surplus / Deficit) and Net Cash Flow.

The next CIV – Farming Property assessments are due in January 2014 and will impact upon MRCC’s budget projections from 1 July 2014 onwards (the latter half of the budget forecast period).

B. Impact of change in projected Rate Base (Scenarios 2.1-2.12)

Variations in projected Rate Base ranging from +6 % through to -6 % and the resulting impact upon Operating Results (Surplus / Deficit) and Net Cash Flow.

MRCC’s Rate Base is accounting for an increasing proportion of MRCC’s Total Revenue. As such, a minor fluctuation in the Rate Base is going to have an increasing impact upon Total Revenue.

C. Impact of change in projected Total Revenue (Scenarios 3.1-3.12)

Variations in projected Total Revenue ranging from +6 % through to -6 % and the resulting impact upon Operating Results (Surplus / Deficit) and Net Cash Flow.

A small change in MRCC’s Total Revenue will have a material impact upon budget projections.

D. Impact of change in Projected Core Operating Costs (Scenarios 4.1-4.12)

Variations in projected Core Operating Costs ranging from +6 % through to -6 % and the resulting impact upon Operating Results (Surplus / Deficit) and Net Cash Flow.

MRCC’s Core Operating Costs (employee benefits, materials and contractors, depreciation & amortization) account for 97 % of MRCC’s Total Expenses. A small change in MRCC’s Core Operating Costs will have a material impact upon budget projections.

E. Impact of change in projected Total Expenses (Scenarios 5.1-5.12)

Variations in projected Total Expenses ranging from +6 % through to -6 % and the resulting impact upon Operating Results (Surplus / Deficit) and Net Cash Flow.

A small change in MRCC’s Total Expenses will have a material impact upon budget projections.

F. Impact of change in projected Operating Grant Funding (Scenarios 6.1-6.12)

Variations in projected Operating Grant Funding ranging from +6 % through to -6 % and the resulting impact upon Operating Results (Surplus / Deficit) and Net Cash Flow.

Operating grants account for approximately 18-21 per cent of MRCC’s Total Revenue during the budget forecast period. As such, minor changes in the size of operating grants received will have a material impact upon budget projections.

G. Impact of Interest Rate Risk exposure (Scenarios 7.1-7.12)

Variations in projected Weighted Average Interest Rate on Interest Bearing Debt ranging from +1.5 % through to -1.5 % and the resulting impact upon Operating Results (Surplus / Deficit) and Net Cash Flow.

Given MRCC’s increasing indebtedness (in the form of Interest Bearing Debt), and MRCC’s preference for long (20-30 year) loan terms, MRCC’s interest rate risk exposure continues to increase throughout the budget forecast period.

H. Impact of self-imposed Rate Base growth limit to CPI (Scenarios 8.1-8.12)

Variations in projected Rate Base ranging from +6 % through to -6 % and the resulting impact upon Operating Results (Surplus / Deficit) and Net Cash Flow.

Deputy Mayor has publicly signalled desire of Council to limit growth in Rate Base to CPI (assumed 2.5 %). In the absence of significant on-going cost savings, such a move will significantly increase the MRCC’s financial risk.

1 There are 12 sub-scenarios within each major scenario, giving a total of: 8 × 12 = 96 scenarios, through 12 ‘windows of analysis’, providing: 96 × 12 = 1152 scenarios considered in the following analysis.

Each scenario has been considered through 12 ‘windows’ of analysis:

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Table 9.2 – 12 ‘Windows of Analysis’ for each of the 8 scenarios examined

Twelve (12) ‘windows’ of analysis Comments – significance of each area of analysis:

1. MRCC Draft Budget 2013/14 ‘As is’ The eight (8) scenarios considered in the preceding table have been evaluated using the unadjusted data as presented in the MRCC Draft Budget 2013/14.

2. Removal of Non-recurrent (Capital) Grant funding with MRCC costing shifting into Capital Grant funding at a rate of 5 %

Non-current (Capital) Grant funding is a significant variable and has a significant impact upon MRCC’s Operating Results and Net Cash Flow. It is also important to highlight that non-recurrent (capital) grant funding can also obscure MRCC’s underlying financial performance. As such, the removal of non-recurrent (capital) funding is necessary in order to gain insight into MRCC’s underlying financial performance / health. The assumption of 5 % cost shifting by MRCC means that when Capital Grants have been removed from the analysis, accompanying expenditures equivalent to 95 % of the Capital Grants removed have also been removed from the analysis. As such, the projected Operating Surplus / (Deficit) and Net Cash Flow will be adjusted by an amount equivalent to 5 % of the Capital Grants removed from the analysis.





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Table 9.2 – 12 ‘Windows of Analysis’ for each of the 8 scenarios examined (Con’t)




6. Removal of Non-recurrent (Capital) Grant funding with no accompanying adjustment to MRCC expenditures

Non-current (Capital) Grant funding is a significant variable and has a significant impact upon MRCC’s Operating Results and Net Cash Flow. It is also important to highlight that non-recurrent (capital) grant funding can also obscure MRCC’s underlying financial performance. As such, the removal of non-recurrent (capital) funding is necessary in order to gain insight into MRCC’s underlying financial performance / health. The non-adjustment to MRCC expenditures means that projected Operating Surplus / (Deficit) and Net Cash Flow will be adjusted by an amount equivalent to the Capital Grants removed from the analysis.

7. MRCC’s history of prior budget accuracy No budgeting exercise is without a margin for error – something which has not been built into the MRCC Draft Budget 2013/14 as it stands. MRCC’s budgets for the preceding five (5) years were reviewed in order to gain insight into MRCC’s prior history in-so-far as budget accuracy (comparison with what actually eventuates in practice) is concerned. This ‘prior budget accuracy’ was then built into MRCC’s Draft Budget 2013/14 in order to gain what might be perhaps a more realistic basis upon which to evaluate MRCC’s financial sustainability over the budget forecast period.

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8. Combined impact of (i) MRCC’s history of prior budget accuracy, and (ii) Removal of Non-recurrent (Capital) Grant funding with MRCC costing shifting into Capital Grant funding at a rate of 5 %

The combined impact of the removal of non-current (capital) grant funding and building in MRCC’s history of prior budget accuracy allowed for an analysis of MRCC’s underlying financial sustainability without the obscurity of non-current (capital) grant funding and what may be considered a more realistic set of budget numbers after building MRCC’s prior budget accuracy into the analysis. The assumption of 5 % cost shifting by MRCC means that when Capital Grants have been removed from the analysis, accompanying expenditures equivalent to 95 % of the Capital Grants removed have also been removed from the analysis. As such, the projected Operating Surplus / (Deficit) and Net Cash Flow will be adjusted by an amount equivalent to 5 % of the Capital Grants removed from the analysis.





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12. Combined impact of (i) MRCC’s history of prior budget accuracy, and (ii) Removal of Non-recurrent (Capital) Grant funding with no accompanying adjustment to MRCC expenditures

The combined impact of the removal of non-current (capital) grant funding and building in MRCC’s history of prior budget accuracy allowed for an analysis of MRCC’s underlying financial sustainability without the obscurity of non-current (capital) grant funding and what may be considered a more realistic set of budget numbers after building MRCC’s prior budget accuracy into the analysis. The non-adjustment to MRCC expenditures means that projected Operating Surplus / (Deficit) and Net Cash Flow will be adjusted by an amount equivalent to the Capital Grants removed from the analysis.

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A risk profile of the Mildura Rural City Council was subsequently developed – see Table 9.4

(over-page). The basis of distinction between the different degrees of risk exposure have

been summarized in Table 9.3 below:

Table 9.3 – Distinguishing between degrees of risk exposure

Legend: - Very significant risk (1 % movement in key variable/s results in a movement in Operating Surplus / (Deficit) and/or Net Cash Flow greater than $1 million) - Significant risk (1 % movement in key variable/s results in a movement in Operating Surplus / (Deficit) and/or Net Cash Flow greater than $500 000 but less than $1 million) - Moderate risk (1 % movement in key variable/s results in a movement in Operating Surplus / (Deficit) and/or Net Cash Flow of greater than $100 000 but less than $500 000) - Low risk (1 % movement in key variable/s results in a movement in Operating Surplus / (Deficit) and/or Net Cash Flow of less than $100 000)

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Table 9.4 - MRCC – Sensitivity Analysis: Summary of Results – MRCC Risk Profile

Unchanged

Removal of Capital Grants – Various Scenarios Prior

Budget Accuracy

Prior Budget Accuracy + Removal of Capital Grants –

Various Scenarios

‘As is’ –

based upon original 2013/14

Draft Budget

Projections

Removal of Capital

Grants, 5 % cost shifting

Removal of Capital


Removal of Capital


Removal of Capital


Removal of Capital

Grants

Incorp. Of

Prior budget accuracy

into 2013/14

Draft Budget

Projections

Prior budget

accuracy +

Removal of Capital Grants, 5 % cost shifting

Prior budget

accuracy +

Removal of Capital Grants,

10 % cost shifting

Prior budget

accuracy +


15 % cost shifting

Prior budget

accuracy +


20 % cost shifting

Prior

budget accuracy

+ Removal of Capital

Grants

1. Impact of change in CIV – Farming Properties

2. Impact of change in projected Rate Base

3. Impact of change in projected Total Revenue

4. Impact of change in Projected Core Operating Costs

5. Impact of change in projected Total Expenses

6. Impact of change in projected Operating Grant Funding

7. Impact of Interest Rate Risk exposure

8. Impact of self-imposed Rate Base growth limit to CPI

Note: Light green shading for scenarios on right-hand side of Table 9.2 indicate that these scenarios project fundamentally better outcomes due to the incorporation of prior budget accuracy into the scenario analysis. MRCC’s prior budget accuracy indicates that Total Revenue has historically been understated by 14.66 %, and Total Expenses have been historically understated by 11.50 %. Thus, initial projected Operating Results and Net Cash Flows have been adjusted upwards to reflect this fact.

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Summary of key findings – Chapter 10: 28 Issues of Concern

In the following table, a summary of the 28 issues of concern raised in this chapter is

presented. For each issue of concern, (i) the issue of concern is identified; (ii) a brief

summary is provided in order to highlight why the identified issue is an ‘issue of concern’;

and (iii) a brief summary of the findings in relation to the issue of concern is presented.

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Table 10.1.1 - Summary of key findings: 28 issues of concern

Issue of concern Why is it an issue of concern? Finding/s

1. Growth in indebtedness at a time when the capacity to service debt is deteriorating

Growth in indebtedness at a time when the capacity to service debt is deteriorating results in an increase in an organization’s underlying financial risk. Financial risk being defined as the capacity of an organization to service debt and meet other financial obligations.

- MRCC’s indebtedness in terms of Total Liabilities and Interest Bearing Debt, and in actual dollar terms and as a percentage of Underlying Revenue less Capital Grants, has been increasing during the last 3 years and in projected to continue to increase during the budget forecast period;

- MRCC’s capacity to service debt in terms of deteriorating operating results, deteriorating liquidity and Net Cash Flows, and inadequate growth in net income to generate sufficient operating surpluses to service increase indebtedness.

2. There are a number of significant concerns in relation to the MRCC’s Debt Strategy

As noted in Chapter 8, the MRCC’s debt strategy is resulting in significant on-going cost imposts for the Mildura community. In addition, deliberate choices on the part of the MRCC to maintain high levels of debt will limit the capacity of the MRCC to respond to unforeseen events and to engage in new capital investment programs going forward.

- The use of excessively long loan terms is resulting in a significant cost impost for the Mildura community;

- Debt has been used to fund Working Capital. There is evidence to suggest that debt is being used to ‘gap fill’ annual operating budgets;

- There is a demonstrated tendency to ‘max out the credit card’ which is leaving MRCC with a reduced capacity to respond to unforeseen events and/or engage in future capital investment programs;

- MRCC Budget 2013/14 contains no strategy for debt reduction – this is an anomaly within the G18 peer group of local Councils.

- Introducing a moratorium on new borrowings and re-financing debt to a maximum 7.5-10 years are the two keys for reducing the MRCC’s indebtedness and reducing significant debt-related costs.

3. Borrowing $4.0 million over 10 years to fund Working Capital

As a general rule, the use of debt to fund Working Capital is symptomatic of poor financial management, impending financial distress, or a combination of the two.

- The use of $4.0 in debt to fund Working Capital has effectively added $1.281 million to operating costs. This has come about primarily through poor planning on the part of the MRCC as the Council had prior notice of the Special Call (although not the actual amount).

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Table 10.1.1 – Summary of key findings: 28 issues of concern (Con’t)


4. MRCC has been experiencing consistent negative net income growth – symptomatic of inadequate control over operating costs

In order to be financially sustainable in the long-term, an organization must be able to control operating costs by keeping the growth in operating costs at least within the parameters of growth in total revenue. That is, if total revenue grows by 4.0 per cent, then increases in operating costs must be kept to a maximum of 4.0 per cent. On-going negative net income growth (that is, where the growth rate in Operating Expenses exceeds the growth rate in Underlying Revenue) is symptomatic of inadequate control over operating costs and will lead to perpetual operating deficits in the longer-term regardless of an organization’s starting point.

- MRCC’s Net Income Growth during 2007/08-2016/17 has been / is projected to be -1.3 %;

- During 2005-10, MRCC’s Net Income Growth differential was 2.16 % - significantly below Victorian LG sector was 14.77 %, RRC – 19.12 %, SSC – 15.37 %;

- Contributing factors include: - Excessive growth in operating expenditures (32.08 %) compared to

LG Sector average of 14.77 %, RRC – 19.12 %, and SSC – 15.37 %; - Poor revenue growth during 2007/08-2011/12 at 20.66 %

compared to RRC – 41.56 %, and SSC – 44.02 %. - Poor revenue growth brought about due to 5 of 6 non-rate

sources of income exhibiting negative growth rates. - The MRCC must limit expenditure growth to CPI and/or Underlying

Revenue growth rate.

5. The MRCC ‘s reported (‘Headline’) results for 2011/12 and 2012/13 included significant non-monetary items

Non-monetary items are essentially ‘book entries’ and cannot therefore be used to service debt or fund operations. As such, the MRCC’s reported (‘Headline’) results for 2011/12 and 2012/13 convey a potentially mis-leading picture of the MRCC’s underlying operational performance.

- The reported Headline operating results for the MRCC in 2011/12 contained non-monetary (‘book entry’) items totalling $14.645 million, which accounted for 64.7 % of the Headline operating surplus of $22.327 million.

- The reported Headline operating results for the MRCC in 2012/13 contained non-monetary (‘book entry’) items totalling $7.605 million, which accounted for 40.4 % of the Headline operating surplus of $18.826 million.

- As such, the MRCC’s reported Headline operating surpluses during the past 2 years do not reflect the MRCC’s underlying operational performance.

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6. Poor earnings quality over extended period of time

Although consistent with Local Government sector accounting practice, the MRCC’s reported operating results during the 2009/10-2011/12 period and projected operating results for the 2012/13-2013/14 period contain significant non-monetary (‘book entry’) and capital grant items which effectively render the reported / projected operating results meaningless as an indicator of underlying operating performance.

- Non-monetary (‘book entry’) items and adjustments and capital grant have accounted for between 29..25 – 150.65 % of the MRCC’s reported Headline operating results during 2007/08-2012/13.

- As such, the MRCC’s reported Headline results during this period cannot be used as an indicator of underlying operational performance.

7. There have been material reductions in the average depreciation rate applied to Infrastructure, Property, Plant & Equipment (IPPE) assets during 2009/10 - 2013/14

A reduction in annual depreciation allowances at a time when the value of depreciable assets has actually been increasing is an anomaly. Potential ramifications include: (i) An effective de-funding of future asset

maintenance and renewal programs at the same time as reporting improved operating results (due to a reduction in operating expenses); and,

(ii) Using ‘saved’ monies to fund on-going operating activities.

- The MRCC’s average depreciation rate applied to IPPE assets decreased significantly in 2009/12 and 2011/12, and is projected to decrease again during 2013/14.

- This has happened in spite of significant growth in IPPE assets –During 2007/08-2011/12, the average growth in Depreciation Expense for the RRC peer group of local Councils – 22.25 %, and SSC – 21.93 %, MRCC – -4.35 %. The MRCC was the only local Council within the G18 peer group to record a negative growth rate in depreciation allocations during 2007/08-2011/12.

- There is evidence that suggests that the MRCC has under-allocated monies to depreciation to the tune of $4.8 million per annum during 2008/09-2016/17 (actual and projected allocations).

- The reduction in depreciation allocations has been substantially matched by a reduction in cash reserves and an increase in debt which suggests that the MRCC has effectively been de-funding asset maintenance and renewal programs in order to fund operations, and bridging the short-fall in depreciation allocations through running down cash reserves and debt.

- Based upon this analysis, reported annual operating results during 2009/10-2016/17 have effectively been over-stated by an average of $4.06 million.

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8. In 2011/12 and 2012/13 the MRCC has included external grant monies received in advance in operating income, resulting in an over-statement of reported operating results in both years

Although deemed acceptable practice according to Local Government sector accounting principles, the inclusion of external grant monies received in advance in operating income (rather than as ‘pre-paid’ income as per private sector accounting practice) effectively results in an over-statement of operating results equivalent to the amount of external grant monies received in advance.

- The MRCC’s reported operating results for 2011/12 included external grant monies of $6.157 million received in advance for the 2012/13 financial year.

- The MRCC’s reported operating results for 2012/13 included external grant monies of $6.05 million received in advance for the 2013/14 financial year.

- As such, the MRCC”s reported operating results for 2011/12 were effectively over-stated by $6.157 million, and the MRCC”s reported operating results for 2012/13 were effectively over-stated by $6.05 million.

- This over-statement has been acknowledged by the MRCC Mayor and CEO in the introduction to the MRCC’s Annual Report in both years.

9. There is mounting evidence that the MRCC is experiencing increasing solvency problems

In order for an organization to be financially sustainable in the long-term, it must be both profitable and solvent. Although periods of unprofitability and/or low levels of solvency can be tolerated in the short-term, there must always be a return to profitability and/or solvency in the medium term. In the case of the MRCC, the Council’s profitability – in the form of underlying operating results after Capital Grants are removed from the analysis, and the Council’s Net Cash Flow have been deteriorating for 3-4 years and, based upon projections in the MRCC Draft Budget 2013/14, will not show any significant signs of improvement during the budget forecast period.

Signs of MRCC’s increasing solvency problems include: (i) The liquidation of $13.8 million in financial assets to fund

2012/13 Statement of Cash Flows; (ii) A significant deterioration in holdings of Cash and Cash

Equivalents during the last 3 years; (iii) Statements contained in official MRCC Council Minutes /

Business Papers citing inadequate working capital as a justification for proceeding with a $4.0 million loan over 10 years; and,

(iv) A projected Net Cash Flow deficit of $11.7 million for 2013/14.

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10. The MRCC’s employee costs indicate that staffing levels at the MRCC may be too high

Employee costs account for approximately 43.0 per cent of the MRCC’s total operating expenses. This is projected to increase to 46.7 % by 2016/17. Excessive employee costs may indicate over-staffing or a Council’s involvement in an excessive level of non-core service delivery functions.

- Using five (5) proxy indicators, the MRCC’s total annual staffing costs compare unfavourably to RRC peer group on 3 of 5 proxy indicators, and in comparison with SSC peer group of local councils, 5 of 5;

- These findings indicate that the MRCC’s staffing costs are excessive relative to other local Councils and is suggestive of potential over-staffing.

11. The level of rates levied by the MRCC are among the highest within the G18 peer group even though the MRCC community is the 3rd most disadvantaged community in Victoria

The imposition of taxes on households / communities will always be an area of public policy that is controversial and subject to a diversity of opinion. However, at a most general level, the idea of a progressive tax system is largely in line with a broader societal ethos of fairness within Australian society. The high level of rates across the MRCC municipality is contrary to the notion of progressivity within the tax system, and has direct implications for the municipality’s cost of living, economic competitiveness, and employment.

- The MRCC community is the 3rd most disadvantaged community in Victoria based upon the latest SEIFA Index of Relative Socio-economic Advantage and Disadvantage;

- Within the G18 peer group of local Councils, the MRCC’s residential rate, at 0.007035 cents per $1 CIV, is 62 % higher than the G18 average of 0.004338 cents per $1 CIV;

- Within the G18 peer group of local Councils, the MRCC’s farmland property rate, at 0.007035 cents per $1 CIV, is 93 % higher than the G18 average of 0.003637 cents per $1 CIV;

- Within the G18 peer group of local Councils, MRCC’s average rate levy applied to rateable properties, at 0.007304 cents per $1 CIV, is 61 % higher than the G18 average of 0.004545 cents per $1 CIV;

- Within the G18 peer group of local Councils, the MRCC Community’s capacity to pay for local Council service delivery is ranked the lowest (along with the Rural City of Swan Hill);

- Within the G18 peer group of local Councils, the relative cost of local Council service delivery relative to median household income is 57 % higher than the G18 average.

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12. Speculation that the MRCC was potentially seeking to re-incorporate Mildura Airport into MRCC operations

When an organization is experiencing financial distress, one of the ways in which an organization may address the situation is through acquiring a revenue stream and/or cash reserves through taking over or merging with another organization that is in a relatively stronger financial position. Such behaviour is well documented in the management literature. In relation to the MRCC, during the early part of 2013, there was speculation that the MRCC was potentially seeking to re-acquire the Mildura Airport Pty Ltd - which had previously been set up as a separately managed wholly-owned subsidiary of the MRCC. The Mildura Airport Pty Ltd has been experiencing significant growth during the past decade in terms of passenger throughput and profitability. Reported profits for the Mildura Airport Pty Ltd were in the vicinity of $430 000. During the 2012/13 financial year the Mildura Airport Pty Ltd also received significant capital grant funding to expand the local terminal building (the expansion was completed in July 2013).

Although MRCC has rejected the speculation and claimed that the Mildura Airport Pty Ltd is ‘fully accounted for’ in MRCC annual accounts, the re-incorporation of Mildura Airport Pty Ltd into MRCC operations as a business unit (as opposed to a separate wholly owned subsidiary) would mean: - Grant income received by Mildura Airport Pty Ltd would be

included in Grant income of MRCC (and therefore Headline Revenue of MRCC);

- Operating surplus (profits) of Mildura Airport Pty Ltd would become part of MRCC’s operating surplus (instead of a revaluation increment being recognised in Comprehensive Income); and,

- Cash Reserves held by Mildura Airport Pty Ltd would be under the direct control of MRCC.

Although the speculation was not substantiated, the argument that it would be financially beneficial for the MRCC to re-incorporate the Mildura Airport Pty Ltd back into the MRCC as an operational business unit is plausible.

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13. The portrayal of MRCC’s financial performance in Budget 2013/14 document is potentially misleading

The MRCC’s performance in relation to: - Past and projected operating performance; - Rating policy – in particular, claimed / projected

rate increases; and, - Expenditure control;

As presented in the MRCC’s Budget 2013/14 document is potentially misleading to the local community.

- Reported past and projected operating results include non-monetary (‘book entry’) items such that cumulative operating surpluses for 2011/12-2013/14 total $52.48 million. Actual Underlying Results reveal a cumulative surplus of $XX;

- The incorporation of the Drainage Differential Rate into the Residential Rate will result in the Drainage Differential Rate effectively being subject to annual indexation for the first time;

- Although it was claimed that rates were only increased by 5.0 % for 2013/14, the annual increase in total Rates & Charges – which is the total bill that a ratepayer must pay - is projected to be 7.04 %;

- The cost of service delivery is portrayed as decreasing by 10.66 %, when in fact the cost of service delivery is projected to increase by 2.11 % during 2013/14.

14. There is a lack of public information in relation to CEO and SMT Key Performance Indicators for performance and/or performance bonuses

There is an abundance of literature in Accounting and Management journals which have clearly documented the direct link between the behaviour / decision-making of senior managers in organizations with Key Performance Indicators (KPIs). Indeed, the reason why an organization, its board or other governing body, puts into place clear, specific KPIs is in order to ‘encourage’ performance in a particular direction. Any modern organization would be remiss if its governing body did not develop and impose a set of clearly specified KPIs.

MRCC Senior Management Team Key Performance Indicators (KPIs) are not publicly available.

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15. Lack of detail in Draft Budget 2013/14 in relation to risk (sensitivity) analysis and debt reduction strategies

Modern-day organizations operate in many different local, geographic, political and economic contexts but no matter the context, risk management and planning for uncertainty are part and parcel of any strategic planning and budgeting process. As such, when setting a budget for the coming 3-5 years, it is important to factor potential risk exposure/s into the analysis with the aim of evaluating the impact – in financial terms – of any changes in key variables underpinning budget assumptions. A failure to incorporate risk management into an annual budgeting process potentially leaves an organisation exposed and/or under-prepared for any detrimental changes in key areas of risk exposure during the budget forecast period.

MRCC Budget 2013/14 document contains no formal risk analysis in relation to future budget projections.

16. The MRCC is exhibiting a combination of indicators which are consistent with an organization that is experiencing financial distress

Financial distress can be defined as a situation in which an organization’s financial position and/or performance is such that, all other things being equal, there is an increased risk that the organization may not be able to achieve its stated objectives

- The MRCC is exhibiting 10 of 13 ‘classic’ indicators of financial distress. This finding is consistent with the financial ratio analysis presented in Chapter 4, and with a number of other observations noted throughout this report.

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17. MRCC’s Strategic Resource Plan promotes a financial plan will result in increased underlying financial risk

The financial plan presented in the MRCC’s Strategic Resource Plan promotes increased indebtedness at a time when both operating results and solvency are deteriorating significantly.

- An analysis of the MRCC’s Budget 2013/14 clearly indicates that underlying financial risk is going to increase during the budget forecast period due to (i) deteriorating operating results; (ii) deteriorating solvency; (iii) increasing indebtedness; (iv) an absence of any material operating surplus – from which the capacity to repay debt is derived; and (v) a material increase in the MRCC’s level of indebtedness.

- Significantly, neither the MRCC Budget 2013/14 document, nor that MRCC Strategic Resource Plan 2013/14-2016/17 contain a clear strategy for reducing the MRCC’s increasing indebtedness.

18. There are a number of legitimate questions that need to be asked about the MRCC’s internal governance structure and/or processes

Sound internal governance processes are critical to the on-going operation of any organization. A review of one of the MRCC’s recent Annual Reports found that many recommendations being made by the Internal Audit Committee were not being implemented. This raised concerns about the MRCC’s governance structure and processes.

- In relation to the MRCC, there is evidence of (i) non-implementation of recommendations from the internal audit committee; (ii) a reduction in transparency in relation to the MRCC’s reported performance in relation to the implementation of recommendations from the internal audit committee; (iii) a sub-optimal governance structure.

- The author has made a range of recommendations to improve the MRCC’s internal governance processes and performance reporting.

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19. There are a number of concerns in relation to the MRCC’s response to concerns raised about the MRCC’s increasing indebtedness

In June 2013 concerns were raised about the MRCC’s increasing indebtedness. The MRCC’s response to these concerns was somewhat dismissive, contained factual inaccuracies, and lacked substantive detail

Key findings included (but were not limited to) the following: - The MRCC is the 3rd most indebted local Council in the G18 peer

group of local Councils; - Although the MRCC’s debt level is officially classified as ‘low risk’,

this assessment is based upon a potentially mis-leading measure of indebtedness and ignores the impact of the MRCC’s increasing Rate Base dependency which will allow the MRCC to increase its indebtedness by 27 % during the budget forecast period without breaching the ’40 % of Rate Base’ low risk benchmark;

- In addition, the MRCC’s deteriorating financial performance and resulting deterioration in solvency – and therefore the MRCC’s capacity to servicing its increasing indebtedness – is ignored in this analysis;

- The MRCC has been making use of excessive loan terms which has resulted in a significant increase in the cost of debt relative to other local Councils – the use of excessive loan terms is obscuring the true cost of the MRCC’s increasing indebtedness to the local community;

- Based upon projected principal repayments over the budget forecast period, the MRCC’s projected average term for outstanding debt (assuming no new borrowings) is 14.40 years, which is 62 % higher than the G18 average of 8.91 years;

- The MRCC’s cost of servicing every $1 million of debt is estimated to be 46 % higher than the G18 peer group average due to the use of excessive loan terms; and,

- The MRCC has signalled intent to keep debt at or near 40 % of its Rate Base in spite of a significant reduction in projected capital works during the budget forecast period. This is an anomaly within the G18 peer group of local Councils.

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20. The MRCC’s future capacity to respond to unforseen events and/or to embark upon significant new capital developments is being threatened by current and projected underlying financial issues

The MRCC’s underlying financial issues are translating into a reduced capacity to respond to unforseen events and/or to embark on significant new capital projects. This has direct implications for the local Community.

- During the past 2-3 years the MRCC has run down its cash reserves, increased its indebtedness, and failed to exhibit fiscal discipline in relation to expenditure control;

- The MRCC’s Budget 2013/14 document forecasts cumulative operating deficits and cumulative Net Cash Flow deficits for the budget forecast period (2013/14-2016/17) which signal a weakened financial position for the duration of the budget forecast period;

- The capacity of the MRCC to embark upon significant new initiatives such as the proposed Indoor Sporting Complex has been significantly reduced without the MRCC receiving significant external grant funding and the MRCC increasing its currently high level of indebtedness;

- Public statements by the MRCC Mayor and CEO are supportive of this analysis.

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21. Based upon the MRCC’s current and projected discretionary decision-making and financial performance, rate levy increases of at least 5-7 % per annum will continue into the foreseeable future

The average rate applied to rateable properties across the MRCC municipality is already 0.007304 cents per $1 CIV, which is 61 % higher than the G18 peer group of local Councils average of 0.004545 cents per $1 CIV. Combined with the fact that the local community’s capacity to pay for local Council service delivery is the lowest (along with the Rural City of Swan Hill) within the G18 peer group, continued rate levy increases of at least 5 % per annum are unacceptable.

There are at least five (5) reasons why the MRCC’s rate increases cannot be limited to CPI within the foreseeable future: - Current budget projections do not allow for a reduction in rate

increases below 5 % without forcing the MRCC into perpetual operating deficits;

- The MRCC’s narrowing revenue base, with the Rate Base accounting for 64.8 % of Underlying Revenue by 2016/17, is placing increased pressure upon the MRCC to maintain annual rate levy increases of at least 5 %;

- The MRCC has a poor record of cost constraint. During 2007/08-2016/17, actual and projected average annual growth in expenses (3.7-4.1 %) exceeded the average annual growth in Underlying Revenue of 2.6 % - this is an unsustainable scenario;

- Limited population growth and slowing development approvals is inhibiting the growth rate in the MRCC’s CIV base, which in turn maintains pressure upon the MRCC to maintain annual rate levy increases of at least 5 %;

- The capital growth of rateable properties within the MRCC municipality is insufficient to create additional rate revenue to allow for a reduction in the level of rates being applied.

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22. Sector-wide practices are hampering the potential effectiveness of the MRCC’s annual budget process as a mechanism for improving local Council financial performance

An organization’s annual budgeting process plays a key role in relation to (i) the implementation of the organization’s strategic plan, (ii) risk management, (iii) performance evaluation and review, and (iv) fiscal discipline. However, normalized sector-wide practices and discretionary decision-making by the MRCC appear to have circumvented three (3) of these key budgetary functions.

- There is a clear linkage between the MRCC Budget 2013/14 and the MRCC’s Strategic Plan and Strategic Resources Plan;

- The MRCC’s Budget 2013/14 contains no serious consideration for risk management;

- The MRCC’s Budget 2013/14 contains no detailed performance evaluation and review for 2012/13;

- There appears to have been a decoupling of the disciplinary function of the budget from organizational practice.

23. The current rate review which has been commissioned by the MRCC appears to be focussed upon the wrong issues

The current rate review that was commissioned by the MRCC does not include a brief to examine the MRCC’s key underlying financial problems, namely (i) Slowing revenue growth; (ii) On-going growth in operating costs in excess of the average annual growth rate in Underlying Revenue; and (iii) Increasing indebtedness. As such, it is difficult to see how this rate review is going to provide any tangible solutions to these underlying financial problems.

Key findings include: - The consultant’s brief ignores a range of key underlying problems

being faced by the MRCC and therefore indicates a potential mis-diagnosis of the underlying causes of the MRCC’s financial problems;

- It is plausible that the current rate review is an exercise in placating community concerns about rates rather than dealing with underlying substantive issues.

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24. The MRCC’s current efforts focussed upon internal business review and cost reduction measures appear to be limited in their effectiveness

In order to be financially sustainable in the long-term, it is necessary for an organization to ensure that its operating expense growth is contained within the parameters of Underlying Revenue growth. In the context of local Councils, the containment of operating expenses is also a significant pre-requisite for reducing annual rate levy increases.

- The MRCC’s operating expenses have been growing at an average annual rate of between 1.1 – 1.4 % higher than the growth rate in Underlying Revenue. This has added to the pressure to keep increasing rates by an average of 5 % per annum over the past 5 years;

- Although there are disclosures in the MRCC’s 2013/14 Budget that indicate a reduction in the cost of Council service delivery for 2013/14 by 10.66 %, the reality is that the costs of Council service delivery are projected to increase by 2.11 % during 2013/14;

- The MRCC’s own budget projections in relation to service delivery costs show an annual increase in costs of 3.48-3.50 % per annum for 2014/15-2016/17, and an annual increase in employee-related expenditures of 5.8 % - both significantly above the average annual growth rate in Underlying Revenue of -1.0 % for the same period.

25. There has been no disclosure of the existence of, nor potential extent of, cost-shifting of local Council service delivery costs into external capital grant funding

The MRCC has received significant capital grant funding from both State and Federal governments during the past 3 years. However, due to no requirement for local Councils to disclose the rate at which they charge-out costs into capital grants, there is no way to determine the presence or extent of any potential cost shifting behaviour by the MRCC. As such, the significant capital grant funding that has been received by the MRCC over the past 3 years inhibits attempts to assess the MRCC’s ‘true’ underlying operational performance.

Key findings include: - The influx of significant capital grant funding during the past 3

years has obscured the ‘true’ underlying operational performance of the MRCC during this period;

- There is no clear evidence that the MRCC has engaged in cost shifting behaviour in relation to the capital grant funding that it has received during the past 3 years – speculation about the endemic nature of such practices across the Local Government sector cannot be accepted as evidence that it is actually happening at the MRCC;

- On the contrary, there is evidence that the MRCC has actually over-committed itself in relation to its capital works program over the last 3 years relative to the capital grant funding received and the capacity of the MRCC to fund its own contribution to the program.

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26. Local Government sector accounting practices raise a range of concerns

There are a number of permissible accounting practices in the Victorian Local Government sector which raise concerns, not the least of which is the potential to convey a mis-leading picture of the financial performance of individual local Councils.

The primary concerns with Local Government sector accounting practices include: - The inclusion of capital grants, non-monetary and once-off items

in reported Net Surplus / (Deficit) results; - Sub-optimal disclosure requirements in relation to the

effectiveness with which local Councils manage capital projects; - The measurement of a local Council’s indebtedness against Rate

Base instead of Underlying Revenue – thereby obscuring the impact of increasing Rate Base dependency upon reported indebtedness;

- The inclusion of significant infrastructure assets in the Balance Sheet when there is no associated income-generating capacity nor any likely prospect that such assets will be sold at some point in the future;

- Recognising external grant funding received in advance as operating income rather than as prepaid income, which would be a current liability disclosed in the Balance Sheet.

- Sub-optimal disclosure requirements in relation to debt policy, debt repayment strategies, risk analysis, charge-out rates to capital grants and the net cost of capital grant-funded projects to a local Council.

27. The current financial sustainability criteria used by the Victorian Auditor General are too ‘soft’

The current financial sustainability criteria used by the Victorian Auditor General result in alarm bells being raised when a local Council is in financial distress, rather than prior to such a situation unfolding.

- Current benchmarks for low, medium and high risk assessments are too low in relation to (i) Underlying Results, (ii) Liquidity, and (iii) Indebtedness;

- The definitions used for Underlying Result, Self-financing, and Indebtedness are inappropriate;

- There needs to be an increase in the number of financial sustainability indicators being used in order to provide a more detailed assessment of a local Council’s financial performance.

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28. The MRCC’s claims about the nature and purpose of a General Purpose Financial Statement audit are potentially mis-leading

Upon receiving an unqualified audit from the Victorian Auditor General in relation to the MRCC’s financial reports for the 2012/13 financial year, the MRCC issued a media release claiming that the unqualified audit report was ‘…further evidence that the municipality’s finances are being carefully managed..’. This claim is a mis-representation of the nature and purpose of a General Purpose Financial Statement audit and potentially distracts attention away from the MRCC’s underlying financial issues.

- The purpose of a General Purpose Financial Report audit is primarily to check for compliance with an organization’s applicable accounting framework;

- An unqualified audit report indicates that the financial reports as presented comply with the organization’s applicable accounting framework;

- An unqualified audit report is not a financial health check and therefore cannot be used as a basis for claiming that an organization’s finances are being ‘carefully managed’;

- The MRCC’s media release also contained mis-leading statements about the MRCC’s use of debt.

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Summary of key findings – Chapter 11: A review of the MRCC’s rating

strategy with recommendations going forward

The key findings from the analysis conducted in this chapter are as follows:

1. The MRCC’s rating strategy has been the source of significant concern across the

Mildura community – particularly in relation to the general level of rates and the

decision by the MRCC during 2013 to combine the residential and farmland property

categories into one, a decision that resulted in a 12.70 % rate hike for farmland

properties across the municipality.

2. The two key variables that determine a local Council’s rate revenue include (i) the total

Capital Improved Value (CIV) of rateable properties within a municipality; and (ii) the

rate levy applied to the CIV of rateable properties. All other things being equal, a lower

CIV base will inevitably result in a higher level of rates being imposed in order to

generate sufficient rate revenue to fund on-going Council operations.

3. There are a range of philosophical and pragmatic considerations relevant to a local

Council’s rating strategy. Philosophical considerations include efficiency (a tax regime

should not adversely impact upon resource allocation decisions), income distribution or

‘equity’ issues balanced against the degree to which taxation should be levied on a ‘user

pays’ basis. Pragmatic considerations include the need for a local Council to be

financially sustainable, determining a level of on-going service delivery that is

appropriate to meet the current and future needs of the local community, the

community’s capacity to pay for local Council service delivery, and the need to maintain

a municipality’s economic competitiveness.

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4. Some of the key features of the MRCC’s current rating strategy include:

It is a differential rating system and therefore is inherently inequitable (on the basis

that not all rateable property categories are treated equally);

The average level of rates applied across the MRCC municipality – at 0.007304 cents

per $1 CIV - is 60.7 % higher than the average for the G18 peer group of local

Councils. This is not surprising given that the total CIV base across the municipality is

38.5 % below the G18 peer group of local Councils – see Figure 11.C1;

The MRCC has increased rates by an average of 5.0 % per annum since 2007/08 –

this compares favourably with the G18 peer group of local Councils, but is consistent

with what has become normalized practice across the Victorian local government

sector;

Although rates were increased by 5.0 % for 2013/14, the compounding effect of

successive rate increases over time is the key consideration. Successive 5.0 %

increases in rates over a 5-year period result in a total increase in rates of 27.63 %;

The decision by the MRCC to combine the Residential and Farmland property

categories into one rateable property category is an anomaly – all 17 other local

Councils within the G18 peer group have retained separate Residential, Farmland

and Commercial rateable property categories.

5. During 2012/13 consulting firm MacroPlanDimasi conducted the first stage of a review

of the MRCC’s rating strategy. One of the recommendations to come out of this review

was the introduction of a farmland differential rate levy – which is typically lower than

the rate levy applied to residential properties. The MRCC rejected this recommendation

and decided to combine the Residential and Farmland property categories into one and

extend the existing drainage differential rate (which had only previously applied to

approximately 79 % of properties within the municipality) to all properties in the newly

combined ‘Residential + Farmland’ property category. This resulted in a once-off 12.70

% rate hike for Farmland properties. The MRCC provided at least four (4) reasons to

justify this action, including:

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The introduction of a farmland differential rate would introduce inequity between

rateable property types;

Simplicity – it was too complicated to distinguish between irrigated and dry-land

farming areas.

The drainage differential rate was not generating sufficient revenue to meet

drainage expenditures; and,

‘Drainage works’ were a core Council service and therefore all ratepayers should

contribute.

After assessing the four arguments advanced by the MRCC, only the latter two

reasons were found to be credible.

It is the author’s view that based upon current and projected levels of service

delivery, the MRCC simply cannot afford to introduce a farmland differential rate.

The author estimates that the introduction of a farmland differential rate that was

equivalent to 70 % of the residential property rate would cost the MRCC an

estimated $3.004 million in forgone rate revenue on an annual basis.

6. The MRCC’s Underlying Revenue composition is projected to change significantly over

the budget forecast period primarily due to the fact that 5 of the MRCC’s 7 income

streams are projected to contract (grow at a negative rate), and the 6th revenue stream

(Operating Grants) is projected to stagnate – see Figures 11.C2 and 11.C3. This is going

to result in the MRCC’s Rate Base dependency – the degree to which the MRCC is reliant

upon rate revenue as a major source of revenue – increasing significantly over the

budget forecast period. The MRCC’s Rate Base as a percentage of Underlying Revenue is

projected to increase from 50.9 % in 2012/13 to 64.8 % in 2016/17. The contracting

non-rate revenue streams is estimated to result in an effective reduction in the MRCC’s

revenue base of $14.166 million over the budget forecast period (excluding non-

monetary ‘other income’ items of $13.331 million). All other things being equal, the

MRCC’s increasing Rate Base dependency is projected to translate into on-going annual

rate levy increases of at least 5.0-7.0 % into the foreseeable future.

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7. An evaluation of the MRCC’s CIV base revealed a number of significant findings,

including:

A significant decline in the CIV of farmland properties during the 2007/08-2012/13

period. Farmland properties accounted for 25.77 % of total CIV in 2007/08, and this

had fallen to an estimated 20.0 % by 2012/13;

The average annual growth rate in the CIV of business properties has only been 3.56

% for the 2007/08-2013/14 period, which has only been marginally above the

average annual inflation rate (CPI) of 2.83 % for the same period;

Total average annual growth rate of CIV for the MRCC municipality during the

2007/08-2013/14 period has only been 2.34 %, which has been 0.49 % below the

inflation rate (CPI) of 2.83 % for the same period. This means that in ‘real’ (inflation-

adjusted) terms, the total CIV for the MRCC municipality during the 2007/08-

2013/14 period has actually contracted at an average annual rate of 0.49 % - see

Figure 11.C4; and,

Based upon actual data for the 2007/08-2013/14 period, the MRCC’s CIV across the

municipality is not going to deliver any significant boost to rate revenue throughout

the budget forecast period. There are no immediate facts apparent at the time of

writing to suggest any change in this prognosis.

8. Based upon the MRCC’s current budget projections and forecast levels of service

delivery, the MRCC cannot afford to introduce a differential rate for farmland,

residential, or business properties. The introduction of a differential rate for either

rateable property category will have a significant impact upon the MRCC’s capacity to

generate operating or Net Cash Flow surpluses during the budget forecast period – see

Table 11.A1 below.

For example, if the rate levy applied to farmland properties was decreased by 15 %, this

will result in the MRCC’s rate revenue decreasing by approximately $1.38 million per

annum.

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Table 11.A1 - Summary: Impact of reducing the rate levy applied to each rateable property category upon the MRCC’s annual rate revenue

Rateable property category

Decrease in rate levy

10 % 15 % 20 % 25 % 30 %

Farmland $922166 $1383249 $1844332 $2305415 $2766498

Residential $2818872 $4228308 $5637745 $7047181 $8456617

Business $1073508 $1610262 $2147016 $2683770 $3220524

Cultural & Recreational

$1745

$2618

$3491

$4364

$5236

Current Budget Projections 2013/14 2014/15 2015/16 2016/17

Annual Operating Result ($’000) $-5722 $-333 $65 $448

Annual Net Cash Flow ($’000) $-11 721 $350 $363 $379

It is clear that the introduction of a differential rate for one rateable property category

will require the MRCC to off-set foregone rate revenue by either or a combination of the

following actions:

- Increase the rate levy being applied to other rateable property categories;

- Increase the ‘other charges’ component of annual rate assessment notices for all

rateable property categories;

- Increase the level of charges for other Council-provided services;

- Find ‘real’ efficiency gains that result in a decreased expenditures equivalent to the

foregone rate revenue;

- Reduce the level of service delivery by a degree that will result in decreased

expenditures equivalent to the foregone rate revenue.

9. An analysis of the Mildura community’s capacity to pay for local Council service delivery

revealed a number of significant points:

(a) The Mildura communities’ capacity to pay for local Council service provision – based

upon median household income, property valuations, and the SEIFA Index of Relative

Advantage and Disadvantage - is significantly lower than many other communities

within the G18 peer group of local Councils;

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(b) The cost of the MRCC’s service provision (in terms of Rates and Charges per rateable

property) as a percentage of median household income (4.07 %) is the second

highest within the G18 peer group of local Councils and 18.31 % higher than the G18

average of 3.44 %;

(c) The MRCC’s potential revenue raising capacity over the next 3-4 years is lower

relative to the majority (11) of local Council’s within the G18 peer group. This is

principally due to the fact that 5 of 6 non-rate sources of revenue are projected to

contract over the budget forecast period, and a range of indicators support the view

that the MRCC’s municipality-wide CIV base is not going to grow at a rate sufficient

to support the MRCC’s annual revenue growth needs without rates being increased

by at least 5.0 % per annum over the budget forecast period;

(d) The MRCC has no room to move on the municipality-wide ‘4.0 % of median

household income’ threshold for rates and charges (being already in breach at 4.07

%) and has a relatively low revenue raising potential through growth in the

municipality’s CIV base. As such, the MRCC is caught in a double bind – the cost of

the MRCC’s service delivery is already the 2nd highest in the G18 peer group, and the

MRCC has a relatively low CIV base growth potential in the next 3-4 years.

Combined with contracting non-rate revenue streams, this will mean that there will

be significant pressure on the MRCC to continue to increase rates by at least 5.0 %

into the foreseeable future. These factors will continue to exacerbate a major

underlying issue – the high cost of local Council service delivery within the context of

a community with a relatively low capacity to pay.

(e) There are four (4) ways in which the prognosis summarised in point (d) (above) can

be at least partially resolved: (i) a significant boost in economic development across

the municipality; (ii) significant growth in non-rate revenue sources – in particular,

increased user-based fees and charges for Council services; (iii) significant cuts in the

MRCC’s annual expenditures through either ‘real’ efficiency gains and/or a dis-

continuation of non-core service delivery areas; and/or (iv) a combination of

scenarios (i) to (iii).

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10. Consistent with what appears to have become normalized behaviour across the

Victorian local government sector, the MRCC has consistently increased rates by an

average of 5.0 % per annum at least since 2007/08 – a rate that has consistently been

approximately double the CPI growth rate for the same period – see Figures 11.C9 and

11.2.C10. There are 10 factors which have contributed to this significant real growth in

the MRCC’s tax impost upon the Mildura community:

(i) Expenditure growth which has consistently been in excess of the CPI growth rate

and/or Underlying Revenue growth rate;

(ii) Growth in a range of key input costs which has consistently exceeded the CPI

growth rate;

(iii) Increasing indebtedness – see Figures 11.C11 – 11.C13;

(iv) Growth in capital expenditure programs in excess of the CPI and/or Underlying

Revenue growth rate – see Figure 11.C14;

(v) A commitment to maintaining existing levels of service delivery at a time when

the MRCC’s financial position has been deteriorating;

(vi) A flat-lining of the Underlying Revenue growth rate;

(vii) Low municipality-wide Capital Improved Value base and/or slow municipality-

wide Capital Improved Value base growth rate – see Figure 11.C15;

(viii) A relatively high municipality cost structure;

(ix) Mixed indicators in relation to the MRCC’s ability to achieve real and material

gains in productivity over time; and,

(x) Potential cost shifting from other spheres of government (State and/or Federal).

A summary of the findings of this analysis is presented in Table 11.A2.

Although it is acknowledged that the MRCC has no direct control over two key variables

– the significant geographical dispersion of the MRCC municipality which contributes to

an increased cost per unit of local Council service delivery, and a very low municipality-

wide CIV base, the MRCC does have control over the third major variable – the MRCC’s

discretionary decision making in relation to levels of service delivery and capital works

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programs. The MRCC’s discretionary decision-making in relation to levels of service

delivery and capital works is contributing directly to annual growth in expenditure levels,

an evaporation of the MRCC’s cash reserves, increasing indebtedness, and a resultant

need to increase rates by at least 5.0 % per annum in order to maintain at least a

semblance of a balanced budget.

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Table 11.A2 – 10 factors contributing to MRCC’s rate increases continually exceeding CPI growth

Factor Evaluation of MRCC’s performance

(i) Expenditure growth in excess of the CPI growth rate and/or Underlying Revenue growth rate

Average annual growth rate: 2007/08-2016/17:

Underlying Revenue – 2.7 %

Total Expenses – 3.7 %. Projected average annual growth rate: 2012/13-2016/17:

Underlying Revenue – 0.9 %

Total Expenses – 2.0 %.

(ii) Underlying cost pressures that exceed the CPI growth rate

A range of underlying cost pressures have been growing at a rate above CPI: - Wages & Salaries (projected 2013/14-2016/17) – 4.6-5.5 % - Wages & Salaries (actual / projected expenditures

2013/14-2016/17) – 5.81-5.83 % - Engineering & Construction costs (budget projections

2011/12-2013/14) – 2.4-5.0 % - Non-residential Building Index (budget projections

2011/12-2013/14) – 3.8-4.0 % - MRCC’s estimated Weighted Average Cost Index = 4.8 %

(iii) Increasing indebtedness

Average annual growth rate 2013/14-2016/17: - Actual debt – 2.84 % (13.7 % absolute growth over

2013/14-2016/17); - Debt servicing payments (Interest + Principal) projected to

increase by average annual rate of 7.76 % during 2011/12-2016/17.

(iv) Growth in capital expenditure programs in excess of the CPI and/or Underlying Revenue growth rate

Average annual growth rate in capital expenditure during 2007/08-2012/13 = 16.52 %. If budgeted capital expenditures for 2013/14 included = 13.82 %. In both cases, significantly higher than annual average growth rate in Underlying Revenue for same period.

(v) A commitment to maintaining existing levels of service delivery at a time when the MRCC’s financial position has been deteriorating

MRCC has repeatedly committed itself to maintain service delivery levels in spite of deteriorating financial position. Commitment to maintain service delivery levels significantly reduces potential opportunities to reduce discretionary expenditure. Commitment to maintain EFT staff numbers significantly reduces potential to reduce employee costs.

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Table 11.A2 – 10 factors contributing to MRCC’s rate increases continually exceeding CPI growth (Con’t)

Factor Evaluation of MRCC’s performance

(vi) Flat-lining of Underlying Revenue growth rate

Underlying Revenue growth during 2012/13-2016/17 projected to be 0.9 % per annum. This creates pressure for continual increases in rates to off-set stagnant / negative growth in non-rate income.

(vii) Low municipality-wide Capital Improved Value base and/or slow municipality-wide Capital Improved Value base growth rate

MRCC’s Capital Improved Value (CIV) base equivalent to $6 591 million – 38.5 % below average for G18 peer group of local Councils.

(viii) A relatively high municipality cost structure

Largest municipality (22 087 square kilometres), below average population and rateable property numbers result in increased cost per unit of service delivery relative to other Victorian local Councils.

(ix) Mixed indicators in relation to the MRCC’s ability to achieve real and material gains in productivity

The MRCC has consistently made commitments to maintain existing levels of service delivery; however there is no evidence of any material reductions in resources used. Total Expenses have been increasing at an average annual rate of 4.15 %, and Total Operating Expenditures have been increasing at an average annual rate of 4.97 % during the 2010/11-2016/17 actual and projected period. There is also no evidence of any material reduction in equivalent full-time (EFT) staffing levels during the budget forecast period even though the MRCC’s EFT staffing levels appear to be relatively high compared to other regional local Councils.

(x) Cost shifting from other spheres of government (State and/or Federal)

There is evidence of the practice of cost shifting from State and/or Federal governments across the local government sector. There is also anecdotal evidence which suggests that some local Councils indulge in the practice of using capital grants to subsidize operating expenditures through inflating charge-out rates. The potential impact of cost-shifting from other spheres of government must be acknowledged, however the exact extent to which cost shifting may have contributed to the MRCC’s decision to increase rates in recent years is unknown.

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11. There are 10 key strategies that may be adopted by the MRCC in order to circumvent

continual increases in rates and charges well above CPI growth rates. The 10 strategies

include:

(i) Restricting expenditure growth to CPI growth rate and/or Underlying Revenue

growth rate projections. For example, the current annual growth rate in the

MRCC’s operating expenditures is projected to be 3.83 % per annum over the

budget forecast period. If this were to be reduced to 2.5 %, this would result in

estimated savings of $10.29 million during 2014/15-2016/17, and savings of at

least $5.0 million per annum thereafter;

(ii) Reviewing options for reducing the growth in underlying cost pressures,

including:

Desisting with the current policy of minimizing contract labour;

Desisting with the current policy of maintaining consistent levels of equivalent

full-time (EFT) staff numbers;

Exploring options for outsourcing of service delivery;

Exploring options for leasing (as opposed to buying) assets; and,

Reviewing current materials and equipment supply arrangements.

(iii) Placing a moratorium on new borrowings so that indebtedness can be reduced

over time. The introduction of a moratorium on new borrowings and reducing

the current average debt portfolio term to 5-10 years will result in estimated

savings in interest costs between $17.764 - $21.90 million, and reduce debt

levels by up to 80 % by 2016/17 – see Table 11.A3.

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Table 11.A3 – Significant savings to be made through introducing moratorium on new borrowings and reducing debt portfolio term

Annual Debt Servicing

Payments ($ million)

Estimated Total Interest

Cost ($ million)

Projected Outstanding

Debt – 2016/17 ($ million)

Existing MRCC strategy $3.171 $26.39 $26.304

Introduction of moratorium on new borrowings from 2013/14, and:

A. Repayment of existing debt over 10-year term

$3.176 $8.626 $15.509

B. Repayment of existing debt over 7.5-year term

$3.953 $6.543 $12.099

C. Repayment of existing debt over 5-year term

$5.525 $4.49 $5.201

(iv) Ensuring that capital expenditure programs do not increase at a rate that is

greater than the CPI and/or Underlying Revenue growth rate – given current

budget projections, any increase in projected capital expenditures over the

budget forecast period is likely to result in further increases in indebtedness and

contribute to rate increases above 5.0 % per annum;

(v) Re-examining existing levels of service delivery and making adjustments in line

with a local Council’s on-going financial position – a commitment to maintain

existing levels of service delivery in spite of the MRCC’s deteriorating financial

position significantly reduces the capacity of the MRCC to reduce expenditures to

sustainable levels;

(vi) Increasing non-rate sources of Underlying Revenue growth. 5 of 6 of the MRCC’s

non-rate sources of income are projected to contract over the budget forecast

period. The MRCC must explore options for growing new sources of revenue

through entrepreneurial activities. In addition, the extent to which services

provided by the MRCC are delivered on a ‘user pays’ or ‘cost recovery’ basis must

be reviewed. The author is of the view that the amount of service delivery

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provided on a ‘user pays’ or ‘cost recovery’ basis must be increased and this can

be achieved in two key ways:

Increasing user charges for a range of MRCC’s assets / services by more than

the CPI rate; and,

If there is scope to do so, re-allocating areas of service delivery that are

currently funded by rate income to a ‘user pays’ or ‘cost recovery’ category.

(vii) Although the introduction of metered parking services across the Mildura CBD

and 15th Street retail precinct has the potential to be a significant revenue raising

mechanism and would yield potentially significant Net Operating Results for the

MRCC, it is fundamentally a very inefficient form of taxation given the size of the

associated dead weight loss associated with metered parking services. In effect,

the cost to the community would significantly outweigh the actual dollar benefits

generated by the MRCC in order to fund on-going service delivery. On this basis

alone the author is of the view that metered parking services not be introduced if

the express purpose behind such a move was to raise revenue.

(viii) Introduction of a target-costing approach with a built-in productivity dividend to

the annual operational budgeting process. A target-costing approach to the

annual operating budgeting process is the preferred means of ensuring fiscal

discipline as it forces a local Council to fit annual operations into pre-determined

financial parameters – rate increases and new borrowings cannot be used as a

fall-back position to balance operating budgets.

(ix) Improving the low municipality-wide Capital Improved Value base and/or slow

municipality-wide Capital Improved Value base growth rate. This is a longer-

term challenge and can only be resolved through the promotion of a greater

level of economic development across the municipality; and,

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(x) Exercising high levels of due diligence in relation to decisions to accept increased

service obligations and accompanying funding from other spheres of government

(State and/or Federal);

(xi) A combination of the preceding nine strategies.

12. A comparative evaluation of the MRCC’s rates and charges against the G18 peer group

of local Councils found the following:

MRCC is at a significant disadvantage in terms of capacity to raise rate revenue due

to significantly lower total CIV base. A low CIV base is major reason for rate levies in

MRCC municipality being significantly higher than elsewhere. A lower CIV base also

means that increases in input costs that are beyond the control of the MRCC will

have a proportionately larger impact upon the MRCC’s underlying input costs.

Hence the MRCC must be doubly diligent in ensuring that cost pressures are off-set

by productivity gains and/or adjustments to service delivery levels in order to control

on-going cost pressures and their resultant impact upon rate levels over time;

The major difference between the MRCC and the G18, RRC and SSC peer groups in

relation to the measures noted above is in relation to CIV per rateable property by

rateable property category. The capacity of the MRCC to generate rate revenue on a

CIV per rateable property basis is significantly less than other local Councils

indicating that in order for the MRCC to provide a level of service delivery that is

equivalent to that provided by other local Councils within the G18 peer group, the

MRCC is going to have to levy significantly higher levels of rates, and/or impose

higher user charges;

The data presented above indicates that the MRCC is an anomaly in relation to

Waste Management charges on rate assessment notices. A review needs to be

undertaken to ensure that the charge is sufficient to cover the actual cost of service

delivery in relation to waste management services;

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The MRCC’s CIV base is the Achilles Heel in-so-far as the MRCC’s revenue raising

capacity is concerned. A low CIV base inevitably means a significantly higher level of

rates applied to rateable properties is required in order to raise enough rate revenue

to fund even the most basis level of local Council services.

The implications of this are many, and include a need for the MRCC to be ‘doubly

diligent’ in relation to setting service delivery levels, management operating costs,

and relying on debt to help fund annual budgets. A lower capacity to raise rate

revenue also means a lower capacity to service on-going operating and financial

commitments relative to the MRCC’s rate revenue generating capacity.

In relation to the level of indebtedness, the MRCC should not be adhering to a

‘margin of safety’ or low risk debt parameter equivalent to 40-45 % of the Council’s

Rate Base due to the fact that the MRCC’s capacity to generate increases in rate

revenue through increasing rate levies will result in a significantly higher tax impost

upon the local community relative to other local Council areas;

The MRCC community has a lower capacity to pay for local Council service delivery

compared to G18, RRC and SSC averages.

13. Four concerning trends that are evident in relation to the MRCC municipality were

identified. The four trends are:

A stagnating population growth at 1.126 % per annum;

A stagnating development approvals growth – between 2001/02-2011/12

development approvals across the combined Mildura-Wentworth area only grew by

3.73 %;

Stagnating rateable properties growth at just under 1.0 % per annum; and,

Stagnating total capital improved value base growth at 2.24 % per annum.

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Each of these four trends will have on-going ramifications for the MRCC’s future revenue

raising capacity.

14. In September 2013 the MRCC commissioned the second stage of a rating strategy

review. The author is of the view that the brief given to the consulting firm conducting

the second stage of the MRCC’s rate strategy review is too limited in scope in the light of

the underlying challenges being faced by the MRCC and the broader Mildura

community.

The underlying causes of the MRCC’s current and projected financial challenges centre

around (i) slowing revenue growth - 5 of the MRCC’s 7 sources of revenue are projected

to decline during the budget forecast period; (ii) continual growth in operating costs at a

rate that exceeds the average annual growth rate in Underlying Revenue less Capital

Grants; (iii) increasing indebtedness; (iv) deteriorating liquidity; and (v) a CIV base that is

significantly lower than the average for G18 Councils and growing at an average annual

rate of only 2.34 %.

15. An examination of the impact of changes in the capital improved values and the rate

levy applied to the capital improved values of each rateable property category found

that changes in the capital improved value or rate levy applied to capital improved value

of the Residential / Farmland properties will have a significantly larger proportionate

impact upon the MRCC’s total rate revenue relative to other rateable property

categories.

16. A scenario analysis examining the impact of combined changes in the capital improved

value and rate levy growth over time found that:

The impact of rate levy increases, in terms of revenue raising capacity, will always be

greater as the annual average growth in the CIV of Rateable Properties is increased

(for example, at 2.5 % per annum compared to 1.5 % per annum) due to the

compounding effect of both increases in rate levies applied and growth in the CIV of

Rateable Properties;

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The impact of a 1.0 % per annum increase in the CIV of Rateable Properties with no

change in rate levies will result in an estimated increase in total rate revenue of

$0.481 million in the first year, increasing to $2.454 million in year 5;

Thus, if the CIV of Rateable Properties was to increase by 2.0 % per annum, this will

result in an estimated increase in total rate revenue of $0.962 million in the first

year, increasing to $4.908 million in year 5;

Similarly, an increase in the rate levies applied by 1.0 % with no change in the CIV

value of Rateable Properties will result in an estimated increase in total rate revenue

of $0.481 million in the first year, increasing to $3.055 million in year 5;

Stimulating growth in the total CIV of Rateable Properties must be a priority: As

noted earlier in this chapter (Part 10), given the significant impact that growth in the

CIV of Rateable Properties has upon projected rate revenue, a local Council MUST

give at least as much energy to exploring ways of increasing the total CIV of Rateable

Properties within its LGA as it does to deliberations about the level of rate levy

increases to be imposed. To consider the latter without giving due consideration to

the former is tantamount to only looking at ‘half’ of the potential solution to a

revenue / budget problem;

17. A scenario analysis examining the impact of alternative rate base growth rates upon the

MRCC’s projected operating results found that all other things being equal, the MRCC

simply cannot afford an average annual increase in its Rate Base less than 4.0 %. An

average annual increase in the MRCC’s Rate Base must be at least 5.5 % before the

Council begins to create an operating surplus that could be devoted to the repayment of

debt (that is, when Operating Results less Capital Grants are in perpetual surplus

throughout the 2013/14-2018/19 period).

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18. A scenario analysis examining the impact of alternative operating expense growth rate

upon the MRCC’s projected operating results found that by reducing the total operating

expense growth rate from its current projected rate of 3.83 % per annum to 2.5 % per

annum will result in significant improvements in the MRCC’s operating surplus

commencing from an estimated $1.710 million in 2014/15, $3.367 million in 2015/16,

and $5.213 million in 2016/17.

19. The introduction of a flat (dollar-based) rate charge, a single municipality-wide rate levy,

or a flat (dollar-based) multi-tier rating system would result in a re-distribution of the

current rate burden to lower value residential properties and away from business /

commercial properties when compared to the existing CIV-base levy system currently

used by the MRCC. A rating strategy that is based upon a flat (dollar-based) rate charge,

a single municipality-wide rate levy, or a flat (dollar-based) multi-tier rating system

would be more in line with the promotion of long-term economic growth across the

municipality.

20. The author recommends that the MRCC allow the Mildura community to decide the

level of rates they’re prepared to accept by allowing the community to engage in a non-

compulsory vote on three alternative levels of rate increase: -2.5 %, 0.0 %, and 2.5 %,

with associated local Council service delivery levels. There is nothing in the Local

Government Act 1989 (Vic) preventing the MRCC from engaging in such an initiative and

it would be a significant exercise in genuine community engagement.

21. 20 recommendations have been made based upon the analysis presented in Parts 2-23

of the chapter – see over-page.

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20 Recommendations in relation to the MRCC’s rating strategy

Based upon the analysis undertaken and presented in this chapter, there are 20

recommendations in relation to the MRCC’s rating strategy:

1. Two key factors contribute to an inevitably higher level of rates in the MRCC

municipality: (i) a CIV base that is 38.5 % lower than the G18 average; and (ii) a higher

cost per unit of service delivery that can be attributed to the geographic dispersion of

the MRCC municipality. The MRCC must clearly articulate this message to the local

community in order to ensure that community expectations in relation to the MRCC’s

capacity to deliver services are realistic.

2. The major factor contributing to on-going rate increases averaging 5.0 % per annum

over the past 5 years has been discretionary decision-making by the MRCC. As such,

elected Councillors must ensure the ramifications of their decisions in-so-far as

contributing pressure to increase rates in the future is clearly evaluated.

3. The existing rate structure – see Table 11.B1 below – is clearly an anomaly within the

G18 peer group of local Councils in relation to the combining of residential and farmland

properties into one single rateable property category.

Table 11.B1 – MRCC rating structure for 2013/14

Source: MRCC Budget 2013/14, p.57.

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However, the author is of the view that unless the MRCC is prepared to make the necessary

cuts to annual expenditures in order to off-set any decrease in the rate levy applied to

either or all rateable property categories, or unless the MRCC is prepared to adopt a flat

(dollar-based) uniform rate charge or a flat CIV-based multi-tier rating strategy, the existing

rating structure should be left intact. There are a number of reasons for this view:

(i) Although farming properties were subjected to a 12.7 % rate hike for the 2013/14

financial year, the overall distribution of the rate burden across the various rateable

property categories has not changed in any significant way – indeed, it has remained

relatively constant throughout the 2007/08-2013/14 period – see Figures 11.C16 and

11.C17.

(ii) Although properties outside of immediate built-up areas – which are predominantly

farming properties – may not receive the same degree of local Council service

delivery (for example, the provision of footpaths, connection to the sewerage

network, and so on), there are many other examples where owners of properties

within built-up areas do not receive the benefits of local Council service as well, only

it is in relation to other areas of local Council service delivery (for example, child and

maternal services, or the use of subsidized sporting or playground facilities).

(iii) It is the author’s view that if the MRCC was to embark on a ‘user pays’ approach to

the delivery of what may be regarded as ‘core’ service deliver, then such a policy

must be consistently applied across all rateable property categories. The author is of

the view that such an approach introduces an administrative burden that will create

additional (and unnecessary) costs for the MRCC.

(iv) The introduction of a differential rate for farmland properties is only supported if it is

funded via equivalent expenditure cuts. Given the existing level of rates across all

rateable property categories, to fund a farmland differential rate through increasing

the rate levies applied to non-farmland property categories will result in a material

increase in the financial burden of non-farmland property ratepayers. The author

acknowledges the inherent ‘bind’ that the MRCC municipality is in – the rate burden

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across the municipality is significant relative to median household incomes and

financial hardship is being experienced by a broad section of the Mildura community.

(v) The high rate levy that is currently being applied by the MRCC to business /

commercial (including farming) properties is an issue that must be attended to. It is

the author’s view that a uniform flat (dollar-based) rate charge or a flat levy-based

multi-tier rating system may provide the answer to this challenge and reduce the

relative rate burden currently being shouldered by business / commercial (including

farming) properties – see Key Finding No.10.

4. There are a range of views and philosophical arguments about where and to what

degree a local Council’s rate burden ‘should’ rest in relation to different rateable

property categories – such arguments will always exist as long as there is a rate burden

to be shared. It is the author’s view that the concerns raised in this report require the

immediate discussion to focus upon how the MRCC’s rate burden can be contained in

the short, medium and longer-term. A discussion about how the MRCC’s rate burden is

distributed across different categories of rateable properties is necessary, but only after

strategies for rate levy containment have been formulated and implemented. There are

a number of reasons for this view:

(i) The ‘initial’ contributors to significantly higher-than-average rates include a low

municipality-wide CIV base combined with a geographic dispersion that

inevitably results in higher per unit costs for local Council service delivery. The

former will not change in any significant way in the short-term, and the latter will

remain as long as the current population distribution across the municipality

remains relatively unchanged (which is expected to be the case).

(ii) An annual rate increase of ‘X’ % (that is, any amount) have a disproportionate

impact upon the level of rates being applied to rateable properties within the

MRCC municipality due to an already high starting point – see Figure 11.C1.

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(iii) Annual increases in rate levies above the CPI growth rate are eroding the

desirability of the MRCC municipality as a place to live due to a higher cost of

living, an erosion of the community’s capacity to pay for local Council service

delivery – which is already being tested to a degree that is significantly above

other G18 communities; and an erosion in business competitiveness across the

municipality.

(iv) Annual increases in rate levies are largely a direct result of discretionary decision-

making by the MRCC in relation to the determination of local Council service

delivery levels (incorporating on-going operating and capital investment

programs). It is the MRCC’s failure to contain expenditures within the

parameters of the CPI growth rate and/or the growth rate of the MRCC’s

Underlying Revenue that is a major contributor to average rate increases of 5.0 %

per annum over the 2007/08-2013/14 period and the 2014/15-20161/7 period

(projected).

A discussion about how the MRCC’s rate burden is distributed across different rateable

property groups is necessary. Such discussions must include consideration of an alternative

rating strategy based upon a flat (dollar-based) annual rate charge or the introduction of a

single municipality-wide rate levy – see ‘Recommendation 10 (below).

5. Given the MRCC’s increasing Rate Base dependency over the budget forecast period –

which is due primarily to the fact that 5 of the MRCC’s 7 revenue streams are projected

to contract (grow at a negative rate), and the 6th revenue stream (Operating Grants) is

projected to stagnate (see Figure 11.C2) – the MRCC must actively look for ways to grow

non-rate sources of revenue. This is particularly so given that the MRCC’s CIV base has

only grown at an average annual rate of 2.34 % over the 2007/08-2013/14 period (below

the average annual CPI growth rate of 2.83 % for the same period) meaning that in real

terms, growth in the MRCC’s CIV base has not contributed to the MRCC’s revenue during

the 2007/08-2013/14 period. Any growth in the CIV base – which will largely be due to

economic development across the municipality – is projected to be over the medium

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and longer-term. As such, growth in the CIV base should not be relied upon as a

generator of revenue (in real terms) in the short-term.

6. There are 10 key strategies that should be adopted by the MRCC in order to circumvent

continual increases in rates and charges well above the CPI growth rate. The 10

strategies include:

(i) Restricting expenditure growth to CPI growth rate and/or Underlying Revenue

growth rate projections. For example, the current annual growth rate in the

MRCC’s operating expenditures is projected to be 3.83 % per annum over the

budget forecast period. If this were to be reduced to 2.5 %, this would result in

estimated savings of $10.29 million during 2014/15-2016/17, and savings of at

least $5.0 million per annum thereafter;

(ii) Reviewing options for reducing the growth in underlying cost pressures,

including:

Desisting with the current policy of minimizing contract labour;

Desisting with the current policy of maintaining consistent levels of equivalent

full-time (EFT) staff numbers;

Exploring options for outsourcing of service delivery;

Exploring options for leasing (as opposed to buying) assets; and,

Reviewing current materials and equipment supply arrangements.

(iii) Placing a moratorium on new borrowings so that indebtedness can be reduced

over time. The introduction of a moratorium on new borrowings and reducing

the current average debt portfolio term to 5-10 years will result in estimated

savings in interest costs between $17.764 - $21.90 million, and reduce debt

levels by up to 80 % by 2016/17 – see Table 11.B2.

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Table 11.B2 – Significant savings to be made through introducing moratorium on new borrowings and reducing debt portfolio term

Annual Debt Servicing

Payments ($ million)

Estimated Total Interest

Cost ($ million)

Projected Outstanding

Debt – 2016/17 ($ million)

Existing MRCC strategy $3.171 $26.39 $26.304

Introduction of moratorium on new borrowings from 2013/14, and:

D. Repayment of existing debt over 10-year term

$3.176 $8.626 $15.509

E. Repayment of existing debt over 7.5-year term

$3.953 $6.543 $12.099

F. Repayment of existing debt over 5-year term

$5.525 $4.49 $5.201

(iv) Ensuring that capital expenditure programs do not increase at a rate that is

greater than the CPI and/or Underlying Revenue growth rate – given current

budget projections, any increase in projected capital expenditures over the

budget forecast period is likely to result in further increases in indebtedness and

contribute to rate increases above 5.0 % per annum;

(v) Re-examining existing levels of service delivery and making adjustments in line

with a local Council’s on-going financial position – a commitment to maintain

existing levels of service delivery in spite of the MRCC’s deteriorating financial

position significantly reduces the capacity of the MRCC to reduce expenditures to

sustainable levels;

(vi) Increasing non-rate sources of Underlying Revenue growth. 5 of 6 of the MRCC’s

non-rate sources of income are projected to contract over the budget forecast

period. The MRCC must explore options for growing new sources of revenue

through entrepreneurial activities. In addition, the extent to which services

provided by the MRCC are delivered on a ‘user pays’ or ‘cost recovery’ basis must

be reviewed.

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The author is of the view that the amount of service delivery provided on a ‘user

pays’ or ‘cost recovery’ basis must be increased and this can be achieved in two

key ways:

Increasing user charges for a range of MRCC’s assets / services by more than

the CPI rate; and,

If there is scope to do so, re-allocating areas of service delivery that are

currently funded by rate income to a ‘user pays’ or ‘cost recovery’ category.

(vii) Introduction of a target-costing approach with built-in productivity dividends to

the annual operational budgeting process. A target-costing approach to the

annual operating budgeting process is the preferred means of ensuring fiscal

discipline as it forces a local Council to fit annual operations into pre-determined

financial parameters – rate increases and new borrowings cannot be used as a

fall-back position to balance operating budgets.

(viii) Improving the low municipality-wide Capital Improved Value (CIV) base and/or

slow municipality-wide CIV base growth rate. This is a longer-term challenge and

can only be resolved through the promotion of a greater level of economic

development across the municipality;

(ix) Exercising high levels of due diligence in relation to decisions to accept increased

service obligations and accompanying funding from other spheres of government

(State and/or Federal); and,

(x) A combination of the preceding nine strategies.

7. Stimulating economic development must remain a key priority of the MRCC. The MRCC

must learn to work with State and Federal governments of either political persuasion in

a collaborative manner to ensure that the interests of the Mildura community are not

jeopardised through the pursuit of local and parochial political agendas. On-going

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economic development is the long-term solution to the four concerning trends of

stagnating growth in population, development approvals, rateable properties, and CIV

base across the MRCC municipality and broader Mildura-Wentworth region.

8. A scenario analysis examining the impact of alternative operating expense growth rate

upon the MRCC’s projected operating results found that by reducing the total operating

expense growth rate from its current projected rate of 3.83 % per annum to 2.5 % per

annum will result in significant improvements in the MRCC’s operating surplus

commencing from an estimated $1.710 million in 2014/15, $3.367 million in 2015/16,

and $5.213 million in 2016/17 – see Figure 11.2.C18. Given that containment in annual

operating and capital expenditures is a necessary pre-curser to reducing annual rate levy

increases to 2.5 % or less, the containment in annual operating and capital expenditures

must be a key priority of the MRCC.

9. In order to ensure that annual operating and capital expenditures are contained to

sustainable levels within the parameters of an Underlying Revenue growth rate of 2.5 %

or less, the MRCC must introduce a target-costing based approach with a built-in annual

productivity dividend to the formulation of annual budgets.

10. The MRCC should give serious consideration to the potential of adopting a rating

strategy that is based upon a flat (dollar-based) annual rate charge, a single municipality-

wide rate levy, or a flat (dollar-based) multi-tiered rating system. Although such a rating

strategy will result in an initial re-distribution of the total rate burden toward lower

valued properties due to a ‘flatter’ rating structure, there would be a significant

reduction in the rate burden shouldered by the business (including farming) community.

Such a policy would be more in line with promoting long-term economic development

across the municipality.

11. The MRCC must allow the Mildura community to decide the level of rates they’re

prepared to accept by allowing the community to engage in a non-compulsory vote on

three alternative levels of rate increase: -2.5 %, 0.0 %, and 2.5 %, with associated local

Council service delivery levels. There is nothing in the Local Government Act 1989 (Vic)

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preventing the MRCC from engaging in such an initiative and it would be a significant

exercise in genuine community engagement.

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Summary of key findings – Chapter 12: Developing a long-term sustainable

budget strategy for the MRCC

The key findings arising from the analysis presented in this chapter is essentially a story

about two alternative financial plans that will lead the MRCC and Mildura community to two

distinctly different financial destiny’s, and the willingness of the MRCC to choose between

the two in the light of what is in the best long-term interests of the Mildura community.

In a nutshell, the financial plan proposed by the MRCC’s Strategic Resource Plan 2013/14-

2016/17 and Budget 2013/14 documents will lead the MRCC, and therefore the Mildura

community, to a financial destination which is undesirable for a number of reasons.

Projected outcomes from the MRCC’s current financial plan include:

- Continued growth in operating expenditures at a rate that exceeds the growth rate

in the MRCC’s Underlying Revenue – a scenario that is unsustainable;

- Continual annual rate levy increases of 5.0 % into the foreseeable future – a scenario

that is untenable given the fact that, relative to median incomes, the cost of the

MRCC’s service delivery (as measured by annual Rates and Charges) is already 57.04

% higher than the average for the G18 peer group of local Councils;

- There is no margin for error in the event of unforeseen circumstances – based upon

the MRCC Budget 2013/14 projections, a reduction in projected revenues of only 1.0

% over the budget forecast period will be sufficient to tip the MRCC into continual

operating deficits;

- Increased indebtedness – the MRCC’s current debt (as at 30 June 2013) is expected

to increase from $23.133 million to $26.304 million in 2016/17, and modelling

presented in this chapter suggests that the MRCC’s debt will grow to at least $29

million in 2019/20 with the potential for a greater level of indebtedness if capital

works program expenditures are not capped from 2016/17 onwards;

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- There is very little likelihood of a restoration of the MRCC’s financial assets over the

extended budget forecast period. During 2011/12-2013/14 there was a significant

liquidation of the MRCC’s financial assets in order to fund on-going operations.

Projected successive Net Cash Flows of $-11.721 million, $350 000, $363 000, and

$379 000 during 2013/14-2016/17 will ensure that the MRCC remains in a

substantially weakened liquidity position throughout the budget forecast period;

- The MRCC’s capacity to finance major capital projects has been substantially reduced

during 2011/12-2013/14. Indeed, based upon public comments by key

representatives of the MRCC in recent times, there is little chance of the MRCC

engaging in any significant capital projects without substantial external capital grant

funding or resorting to increased borrowings beyond the $10 million of new

borrowings already foreshadowed in the MRCC’s Budget 2013/14 document. Based

upon the modelling presented in this chapter, there is very little likelihood of a

restoration of the MRCC’s capacity to finance major capital projects throughout the

extended budget forecast period (2013/14-2019/20).

The purpose of this chapter is to proffer a different vision of what can be if a number of

clear – and admittedly tough – strategic budgetary decisions are taken. These budgetary

decisions include the following:

- The introduction of a target costing-based budgeting model;

- Imposing a moratorium on new borrowings from 2013/14 and throughout the

budget forecast period;

- Limiting annual rate levy increases to a maximum of 2.5 % per annum;

- Restoring annual depreciation allocations to 3.25 % - an amount sufficient to ensure

that the MRCC is able to finance the entirety of annual capital upgrade and renewal

program without having to resort to the use of debt throughout the budget forecast

period;

- Capping capital works program expenditures at an annual growth rate of 2.5 % per

annum;

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- The introduction of an annual contingency fund allocation equivalent to 1.0 % of

total Operating Cash Inflows for the purposes meeting unforeseen expenses; and,

- The introduction of a minimum required operating surplus equivalent to 2.0 % of

total Operating Cash Inflows.

If the above measures are taken, then the MRCC will have a financial strategy that will

return the MRCC to a position of financial strength and deliver the following benefits for

the Mildura community over an extended budget forecast period (2013/14-2019/20):

- Expenditure growth will be contained within the parameters set by the annual

growth rate in total Operating Cash Inflows – this will ensure that there will be no

on-going pressure upon the MRCC to increase rates beyond 2.5 % due to excessive

discretionary expenditure. As a result, the MRCC’s currently unsustainable path

wherein annual expenditure growth is projected to exceed the annual growth rate in

Underlying Revenue will have been averted;

- Annual rate levy increases of no more than 2.5 % into the foreseeable future – a

measure that will, over time, restore some normalcy back into the relative cost of

local Council service delivery across the MRCC’s municipality relative to the G18 peer

group of local Councils;

- The establishment of a Contingency Fund equivalent to 1.0 % of total Operating Cash

Inflows, combined with a required minimum operating surplus equivalent to 2.0 % of

total Operating Cash Inflows will mean that the MRCC will be in a position to deal

with unforeseen circumstances in the future. The combined Contingency Fund and

accumulated Operating Surpluses will result in approximately $22.661 million being

allocated for future contingencies, including new capital projects such as the

proposed indoor sports facility which has been the subject of public discussion in

recent times;

- A significant reduction in indebtedness – under the proposed remedial budget, the

MRCC’s debt is projected to decrease to $1.889 million by 2019/20, which is $27.182

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million less than the $29.071 million in debt that MRCC is projected to have in

2019/20 if there is no change in the MRCC’s current financial strategy;

- The reduction in indebtedness noted in the previous point will result in projected

savings in interest costs in the order of $16.134 - $33.064 million accruing to the

MRCC;

- The MRCC’s financial assets will be restored over the budget forecast period – by

2019/20 the MRCC’s financial assets are projected to be in the order of $31.543 -

$39.097 million, compared to $18.710 million if the MRCC pursues its current

financial strategy unabated;

- The MRCC’s capacity to finance major capital projects will be substantially restored

over the extended budget forecast period with a significantly reduced need for

external capital grant funding, and no requirement to rely upon new borrowings;

- Achieving the above outcomes will require achieving combined savings and non-rate

revenue growth of $7.8 - $8.5 million during the first 4 years of the proposed

sustainable budget strategy, tapering to $5.3 and $0.411 million in years 5 and 6

respectively;

- The required combined savings and non-rate revenue growth targets noted in the

previous point can be achieved with minimal impact upon the MRCC’s on-ground

service delivery.

Two plans, two destinies, and a local Council who has the capacity to choose between the

two.

A summary of the proposed sustainable budget strategy – a ‘preferred option’ and a ‘fall-

back option’ that has been developed is presented on the following pages. This is followed

by a number of key graphs which highlight the fundamental differences in projected

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outcomes between the financial plan that is currently being proposed by the MRCC, and the

proposed sustainable budget strategy being proposed in this chapter.

In terms of budget sensitivities and potential risk exposure, the analysis presented revealed

that the most sensitive variables in the budgeting model were (i) annual depreciation

allocations; (ii) the Rate Base growth rate; and (iii) the size of any imposed productivity

dividend, contingency fund contribution and/or minimum Operating Surplus requirement,

with a 1.0 % change resulting in an annual budgetary impact of $3.213 million, $2.297

million and $1.079 million respectively.

In terms of risk exposure, the MRCC’s key risk exposures relate to:

1. Being able to reduce the debt term over which the MRCC’s existing debt of $23.133

million (as at 30 June 2013) is repaid;

2. Being able to achieve an annual growth rate in non-Rate Base revenue of 7.5 %; and,

3. Being able to achieve identified capital grant income targets.

Of course, the MRCC overall risk profile, which was evaluated in detail in Chapter 9 of this

report, remains the same for the proposed sustainable budget strategy, with key risk

exposures being in relation to:

1. Changes in total revenue projections – particularly in relation to non-Rate Base

revenue projections;

2. Whether or not capital grant income projections are realised; and,

3. Prior budget accuracy and the reliability of underlying budget relationships and the

implications of this for budget projections.

The remainder of this chapter consists of a detailed justification and explanation of why the

MRCC should adopt the proposed sustainable budget strategy as presented.

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Proposed Sustainable Budget Strategy: Preferred Option ($’000)

210


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REMEDIAL BUDGET - PREFERRED SCENARIO

SCHEDULE 3 - COMPARISON OF KEY BUDGET ELEMENTS: MRCC BUDGET 2013/14 v PROPOSED REMEDIAL BUDGET

Average Annual

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Growth Rate

A. Annual debt servicing payments (Principal + Interest)

MRCC Budget 2013/14 3212 3050 3311 3109 3171 3171 3171 0.79%

Proposed remedial budget 3953 3953 3953 3953 3953 3953 3953 0.00%

Difference -741 -903 -642 -844 -782 -782 -782

B. Annual depreciation allocations

MRCC Budget 2013/14 15050 15644 15950 16262 16511 16763 17020 1.76%


Difference -4936 -4594 -4583 -4616 -4677 -4740 -4803

C. Projected new borrowings

MRCC Budget 2013/14 - Assumed no new borrowings post-2016/17 (unlikely scenario) 2000 1000 3000 4000 4000 1000 3000

Proposed remedial budget 0 0 0 0 0 0 0

Difference 2000 1000 3000 4000 4000 1000 3000

D. Projected annual capital works program expenditures

MRCC Budget 2013/14 38556 18874 20510 22351 22351 22351 22351 3.68%


Difference 0 0 1164 2522 2026 1518 997

E. Annual budget for on-going operating (non-capital works) activities

MRCC Budget 2013/14 72745 76243 79917 83770 87804 89883 89622 3.51%


Difference 8453 7859 7849 7819 7706 5371 411

F. Rate Base

MRCC Budget 2013/14 55640 58277 61752 65436 69276 73342 77646 6.65%


Difference 0 1246 3295 5518 7860 10390 13121

G. Non-Rate Base Income

MRCC Budget 2013/14 44472 38537 38623 39423 39940 40412 40834 1.19%


Difference 0 0 -2804 -5111 -7935 -11053 -14491

Notes to accompany Schedule 3:

Note 1 - All figures $'000.

Note 2 - Annual depreciation allocations for MRCC Budget 2013/14 for 2017/18-2019/20 based upon 2016/17 with annual growth at 1.53 % in line with annual IPPE growth rate.

Note 3 - Projected borrowings by MRCC during 2017/18-2019/20 highly likely to be minimum of $2.0 million per annum and potentially significantly more.

Note 4 - Capital works program expenditures for MRCC Budget 2013/14 for 2017/18-2019/20 based upon growth rate in capital works expenditures during 2014/15-2016/17.

Budget Forecast Period

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Proposed Sustainable Budget Strategy: ‘Fall-back’ Option ($’000)

MRCC - Proposed Remedial BudgetCHANGES MADE IN THIS ITERATION:

REMEDIAL BUDGET - Fall-Back Scenario Annual Minimum Operating Surplus requirement of 2.0 % of Total Operating Cash Inflows

has been relaxed to 1.0 % of Total Operating Cash Inflows

SCHEDULE 1 - KEY VARIABLES AND JUSTIFICATION

Current Potential

Key Variables: Scenario Options Comments in relation to key variables (optimal targets)

Rate Base growth rate 2.50% 0.0 - 5.0 % 2.5 % is the mid-point of RBA's inflation (CPI) target.

Non-Rate Base revenue growth rate 7.50% 0.0 - 7.5 % Minimum annual growth target of 2.5 %

Annual productivity dividend 1.50% 0.0 - 2.5 % Negotiable - due to minimum operating surplus.

Annual contingency fund allocation 1.00% 0.0 - 1.5 % 1.0 % recommended as minimum annual allocation.

Annual depreciation allowance 3.25% 3.0 - 3.5 % 3.25 % sufficient to cover upgrade & renewal costs.

Annual minimum operating surplus (based upon cash inflows versus expenditures) 1.00% 0.0 - 2.5 % 2.5 % recommended minimum annual operating surplus.

Capital works program expenditure growth rate 2.50% 0.0 - 2.5 % Must be ≤ Underlying Revenue growth rate.

Debt-specific variables:

Outstanding debt portfolio as at 30 June 2013 -23133 Moratorium on new borrowings from 2013/14.

Weighted Average Interest Rate 6.22% 6.00 - 7.50 % Expected to increase during budget forecast period.

Term over which existing debt to be extinguished (years) 7.50 5.0 - 10.0 years 10 years is absolute maximum loan term.

Annual debt repayments (Principal + Interest) $3,953 Will vary depending upon debt strategy adopted.

NUTSHELL ANALYSIS:

Average Annual

Budget item: 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Growth Rate

Projected Rate Base 55640 57031 58457 59918 61416 62952 64525 2.63%

Projected reduction in Rate Base 0 1246 3295 5518 7860 10390 13121

Projected Non-Rate Base Income 44472 38537 41427 44534 47874 51465 55325 8.71%

Projected Operating Cash Inflows 111833 95568 99884 104453 109291 114417 119850 5.08%

Projected capital works program expenditures 38556 18874 19346 19829 20325 20833 21354 2.63%

Projected maximum budget for on-going operating expenditures 65410 69353 73072 77000 81190 85649 90396 6.07%

Projected operating surplus 1118 968 1004 1049 1092 1138 1185

Projected new borrowings 0 0 0 0 0 0 0

Projected debt repayments 3953 3953 3953 3953 3953 3953 3953

Projected outstanding debt balance (at year end - 30 June) -20619 -17949 -15112 -12099 -8899 -5500 -1889 -17.90%

Projected annual savings required to meet budget objectives (A) -7335 -6890 -6845 -6770 -6614 -4234 774

Proportion of projected annual savings accounted for by reduction in projected Rate Base 0.0% 18.1% 48.1% 81.5% 118.8% 245.4% -1695.2%

Comparison of projected annual savings with PREFERRED OPTION (B) -8453 -7859 -7849 -7819 -7706 -5371 -411

Difference in projected annual savings requirements: (A) - (B) 1118 969 1004 1049 1092 1137 1185


214


REMEDIAL BUDGET - Fall-Back Scenario

SCHEDULE 2 - PROPOSED REMEDIAL BUDGET

Average Annual

Proposed Budget: 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Growth Rate

Projected Total Cash Inflow 100112 96814 100375 104859 109216 113754 118480 4.48%

Adjustment for 2013/14 (projected $11.721 million NCF Deficit for 2013/14) -11721

Initial maximum budget parameter 111833 96814 100375 104859 109216 113754 118480 4.48%

Adjustment for reduced Rate Base income:

Projected Rate Base as per MRCC Budget 2013/14 (pp.52-54) (A) 55640 58277 61752 65436 69276 73342 77646 6.59%

Revised Rate Base based upon adjusted annual growth rate (B) 55640 57031 58457 59918 61416 62952 64525 2.66%

Difference (A) - (B) 0 1246 3295 5518 7860 10390 13121

Maximum budget parameter adjusted for reduction in Rate Base income 111833 95568 97080 99341 101356 103363 105359 2.05%

Adjustment for change in Non-Rate Base income:

Projected Non-Rate Base income as per MRCC Budget 2013/14 (pp.52-54) (C) 44472 38537 38623 39423 39940 40412 40834 1.19%

Revised Non-Rate Base based upon adjusted annual growth rate (D) 44472 38537 41427 44534 47874 51465 55325 8.71%

Difference (D) - (C) 0 0 2804 5111 7935 11053 14491

Maximum budget parameter adjusted for change in Non-Rate Base income 111833 95568 99884 104453 109291 114417 119850 5.08%

Less pre-service delivery commitments:

Annual productivity dividend 1677 1452 1506 1573 1638 1706 1777 0.99%

Annual contingency fund allocation 1118 968 1004 1049 1092 1138 1185 0.99%

Annual depreciation allowance 19986 20238 20533 20878 21188 21503 21823 1.53%

Annual minimum operating surplus 1118 968 1004 1049 1092 1138 1185 0.99%

Annual debt repayments (Principal + Interest) 3953 3953 3953 3953 3953 3953 3953 0.00%

Total pre-service delivery commitments 27853 27580 27999 28501 28964 29438 29923 1.24%

Maximum budget parameter after pre-service delivery commitments 83980 67988 71885 75952 80327 84979 89927 1.18%

Capital works program expenditures 38556 18874 19346 19829 20325 20833 21354 2.63%

Less Annual depreciation allowance 19986 20238 20533 20878 21188 21503 21823

Net capital works expenditure 18570 -1364 -1188 -1048 -863 -670 -469

Maximum budget parameter after capital works program commitments 65410 69353 73072 77000 81190 85649 90396 6.07%

New borrowings 0 0 0 0 0 0 0

Maximum budget parameter after proposed new borrowings (E) 65410 69353 73072 77000 81190 85649 90396 6.07%

CURRENT SCENARIO AS PER MRCC BUDGET 2013/14:

Projected Total Cash Inflow 100112 96814 100375 104859 109216 113754 118480 4.48%

Proposed new borrowings 2000 1000 3000 4000 4000 1000 3000

Proceeds from sale of assets 680 703 726 750 0 0 0

Projected cash available 102792 98517 104101 109609 113216 114754 121480 4.66%

Proposed Expenditures as per MRCC 2013/14 (pp.52-54) - to 2016/17 114513 98167 103738 109230 113326 115405 115144 3.46%

Less proposed capital expenditures - capped at 2016/17 level for 2017/18-2019/20 38556 18874 20510 22351 22351 22351 22351 3.68%

Less proposed debt servicing payments 3212 3050 3311 3109 3171 3171 3171 0.79%

Proposed Operating Expenditures (F) 72745 76243 79917 83770 87804 89883 89622 3.51%

Projected Operating Surplus / Deficit -11721 350 363 379 -110 -651 6336

Minimum savings required to be found in order to achieve budget objectives (E) less (F) -7335 -6890 -6845 -6770 -6614 -4234 774

Adjustment to MRCC Budget 2013/14 projections:

Initial projected capital works based upon annual average growth during 2014/15-2016/17 24410 26658 29114


215


REMEDIAL BUDGET - Fall-Back Scenario

SCHEDULE 3 - COMPARISON OF KEY BUDGET ELEMENTS: MRCC BUDGET 2013/14 v PROPOSED REMEDIAL BUDGET

Average Annual

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Growth Rate

A. Annual debt servicing payments (Principal + Interest)

MRCC Budget 2013/14 3212 3050 3311 3109 3171 3171 3171 0.79%


Difference -741 -903 -642 -844 -782 -782 -782

B. Annual depreciation allocations

MRCC Budget 2013/14 15050 15644 15950 16262 16511 16763 17020 1.76%


Difference -4936 -4594 -4583 -4616 -4677 -4740 -4803

C. Projected new borrowings

MRCC Budget 2013/14 - Assumed no new borrowings post-2016/17 (unlikely scenario) 2000 1000 3000 4000 4000 1000 3000

Proposed remedial budget 0 0 0 0 0 0 0

Difference 2000 1000 3000 4000 4000 1000 3000

D. Projected annual capital works program expenditures

MRCC Budget 2013/14 38556 18874 20510 22351 22351 22351 22351 3.68%


Difference 0 0 1164 2522 2026 1518 997

E. Annual budget for on-going operating (non-capital works) activities

MRCC Budget 2013/14 72745 76243 79917 83770 87804 89883 89622 3.51%


Difference 7335 6890 6845 6770 6614 4234 -774

F. Rate Base

MRCC Budget 2013/14 55640 58277 61752 65436 69276 73342 77646 6.65%


Difference 0 1246 3295 5518 7860 10390 13121

G. Non-Rate Base Income

MRCC Budget 2013/14 44472 38537 38623 39423 39940 40412 40834 1.19%


Difference 0 0 -2804 -5111 -7935 -11053 -14491

Notes to accompany Schedule 3:

Note 1 - All figures $'000.

Note 2 - Annual depreciation allocations for MRCC Budget 2013/14 for 2017/18-2019/20 based upon 2016/17 with annual growth at 1.53 % in line with annual IPPE growth rate.

Note 3 - Projected borrowings by MRCC during 2017/18-2019/20 highly likely to be minimum of $2.0 million per annum and potentially significantly more.

Note 4 - Capital works program expenditures for MRCC Budget 2013/14 for 2017/18-2019/20 based upon growth rate in capital works expenditures during 2014/15-2016/17.


217

Key comparative graphs: MRCC Budget 2013/14 versus Proposed

Sustainable Budget Strategy

219

Figure 12.1 - Key Comparison Variable: Projected Indebtedness ($’000)

Commentary: - Over the extended budget forecast period 2013/14-2019/20 there is a clear divergence of paths between the proposed alternative budget

strategy as opposed to the MRCC’s current budget strategy. The MRCC’s projected outstanding debt as at 30 June 2020 is $1.889 million, $27.182 million less than the likely outcome if the MRCC’s current budget strategy is followed without any substantive changes.

$23,333 $22,735 $23,884

$26,304

$28,474 $27,796 $29,071

$20,619 $17,949

$15,112

$12,099

$8,899

$5,500

$1,889

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

MRCC Budget2013/14

ProposedSustainableBudget Strategy

220

Figure 12.2 - Key Comparison Variable – Projected Total Interest Costs ($’000)

* 22 years is the projected weighted average debt portfolio term to 2016/17 based upon (i) projected borrowings during 2013/14-2016/17 budget forecast period; and (ii) stated MRCC policy indicating that new borrowings will be on a principal and interest basis over 20-30 years (MRCC Budget 2013/14, p.22). Commentary: - Above analysis based upon interest rate of 6.25 % per annum. This is marginally higher than the MRCC’s weighted average interest rate on

debt as at 30 June 2013 of 6.22 %, but lower than projected interest rates over budget forecast period (estimated to increase to 6.5–7.5 %). - Over the extended budget forecast period 2013/14-2019/20 there is a clear divergence of paths between the proposed alternative budget

strategy as opposed to the MRCC’s current budget strategy. Projected savings in interest costs accruing to the MRCC (and therefore to the Mildura community) under proposed alternative budget range between $16.134 and $33.064 million.

- Projected interest costs for the extended MRCC Budget 2013/14 projections assume that there will be no further borrowings post-2019/20. As such, the data represented above represents a conservative estimate of the MRCC’s projected interest costs. The MRCC’s track record and current publicly stated views on debt indicate that a moratorium on debt post-2019/20 would be a highly unlikely scenario.

$22,681

$28,349

$34,438 $39,611

$46,078

$58,750

$6,547

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

10 years 15 years 20 years 22 years* 25 years 30 years 7.5 years from2013/14

MRCC Budget2013/14

ProposedSustainableBudgetStrategy

221

Figure 12.3 - Key Comparison Variable – Rate Levy Increases: Projected Residential Rates

Commentary: - Over time the divergence in projected residential rates grows significantly. - MRCC Budget 2013/14 – Rates projected to increase at 5.0 % per annum throughout budget forecast period of 2016/17. Given projected

revenue and expenditure growth rates, combined with the MRCC’s repeated commitment to maintain existing levels of service delivery and equivalent full time staff, it is highly likely that annual rate increases of 5.0 % per annum will continue at least through to 2019/20 unless there is a substantial change in the MRCC’s underlying financial position.

- Proposed alternative remedial budget – Rates projected to increase at a maximum of 2.5 % per annum, in line with the mid-point of the Reserve Bank of Australia’s inflation target range of 2.0-3.0 %.

0.007035

0.007387

0.007756

0.008144

0.008551

0.008979

0.009428

0.007035 0.007211

0.007391 0.007576

0.007765 0.007959

0.008158

0.005000

0.005500

0.006000

0.006500

0.007000

0.007500

0.008000

0.008500

0.009000

0.009500

0.010000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

MRCC Budget2013/14


No growth in RateLevies

222

Figure 12.4 - Key Comparison Variable – Projected Annual Residential Rate Levy charges levied on residential properties

Commentary: - Over time the divergence in projected residential rate charges grows significantly with accumulated savings to the owner of a residential

property with a CIV of $250 000 being $1046, and for the owner of a residential property with a CIV of $350 000 being $1464.

$1,759 $1,847 $1,939 $2,036 $2,138 $2,245 $2,357

$1,759 $1,803 $1,848 $1,894 $1,941 $1,990 $2,040

$- $44 $135 $277

$474 $728

$1,046

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

MRCC Budget2013/14


Cumulative RateSavings

CIV = $250 000

$2,462 $2,585 $2,715 $2,850

$2,993 $3,143 $3,300

$2,462 $2,524 $2,587 $2,652 $2,718 $2,786 $2,855

$- $62 $189 $388

$663

$1,020

$1,464

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

MRCC Budget2013/14


Cumulative RateSavings

CIV = $350 000

223

Figure 12.5 - Key Comparison Variable – Annual Depreciation Allocations ($’000)

Commentary: - Over time the divergence in projected residential rates grows significantly. - Annual difference (ranging between $4.583 - $4.936 million) represents funds that can be applied to investment in capital works (renewal,

upgrade, expansion) without having to resort to debt financing. - The restoration of the MRCC’s annual depreciation allocations from the current rate of 2.5 % of Infrastructure, Property, Plant and

Equipment (IPPE) assets to 3.25 % of IPPE assets will ensure that the MRCC’s Asset Renewal Gap ratio will remain above 1.0 (that is, in the ‘low risk’ category) throughout the extended budget forecast period of 2013/14-2019/20.

$15,050 $15,644 $15,950 $16,262 $16,511 $16,763 $17,020

$19,986 $20,238 $20,533 $20,878 $21,188 $21,503 $21,823

$4,936 $4,594 $4,583 $4,616 $4,677 $4,740 $4,803

$-

$5,000

$10,000

$15,000

$20,000

$25,000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

MRCC Budget2013/142


Difference

224

Figure 12.6 - Key Comparison Variable: Contingency Fund Allocations ($’000)

Commentary: - By allocating 1.0 % of projected Total Operating Cash Inflows to a Contingency Fund, the MRCC will accumulate to a projected $7.554

million by 2019/20. Based upon an annual interest rate of 4.0 %, this will also result in the accumulation of an additional $1.183 million in interest income over the extended budget forecast period – assuming that no withdrawals a made from the fund during this time.

- The contingency fund will enable a significant restoration of the MRCC’s cash reserves over the budget forecast period – see Figure 12.6.9.

$1,118

$2,086

$3,090

$4,139

$5,231

$6,369

$7,554

$45 $128 $252 $417 $627

$881 $1,183

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

AnnualContingency Fund

ProjectedAdditional InterestIncome (@ 4.0 %p.a.)

225

Figure 12.7 - Key Comparison Variable: Accumulated operating surpluses over extended budget forecast period 2013/14-2019/20 ($’000)

Commentary: - By introducing a requirement for a minimum annual operating surplus equivalent to 2.0 % of projected Total Operating Cash Inflows, the

MRCC will accumulate additional operating cash surpluses of $15.107 million by 2019/20. Based upon an annual interest rate of 4.0 %, this will also result in the accumulation of an additional $2.367 million in interest income over the extended budget forecast period – assuming that no withdrawals a made from the fund during this time.

- Accumulated operating surpluses combined with accumulated contingency funds will enable a significant restoration of the MRCC’s cash reserves over the budget forecast period – see Figure 12.8.

$2,237

$4,173

$6,181

$8,278

$10,462

$12,737

$15,107

$89 $256 $504

$835 $1,253

$1,763 $2,367

$1,936 $2,008 $2,097 $2,184 $2,275 $2,370

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

ProjectedCumulativeOperating Surplus


Projected AnnualOperating Surplus

226

Figure 12.8 - Key Comparison Variable: Restoration of the MRCC’s financial assets over extended budget forecast period 2013/14-2019/20 ($’000)

Commentary: - Note: During 2013/14-2016/17 the MRCC’s financial assets are projected to grow at an average annual rate of 2.2147 % as per projections

in the MRCC Budget 2013/14 (p.53). It has been assumed that this average annual growth rate will continue through to 2019/20 – there is no data in the MRCC Budget 2013/14 document that indicates that this will or will not be the case.

- Under the proposed remedial budget, there will be a significant restoration of the MRCC’s financial assets over the extended budget forecast period as a result of annual contingency fund and minimum operating surplus requirements set at 1.0 % and 2.0 % of projected total operating cash inflows respectively.

$16,436

$16,786 $17,149 $17,528 $17,916 $18,313 $18,719 $19,791

$22,695

$25,707

$28,853

$32,129

$35,542

$39,097

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

Projected financialassets: MRCCBudget 2013/14

Projected FinancialAssets: ProposedRemedial Budget

227

Figure 12.9 - Key Comparison Variable: Accumulated operating surpluses over extended budget forecast period 2013/14-2019/20 – Preferred Scenario (Minimum Operating Surplus requirement = 1.0 %) ($’000)

Commentary: - By reducing the minimum annual operating surplus requirement from 2.0 % to 1.0 % of projected Total Operating Cash Inflows, the MRCC

will accumulate additional operating cash surpluses of $7.554 million by 2019/20. Based upon an annual interest rate of 4.0 %, this will also result in the accumulation of an additional $1.183 million in interest income over the extended budget forecast period – assuming that no withdrawals a made from the fund during this time.

- Accumulated operating surpluses combined with accumulated contingency funds will still enable a significant restoration of the MRCC’s cash reserves over the budget forecast period, although to a lesser degree than the preferred scenario (Minimum Operating Surplus requirement of 2.0 %) – see Figure 12.10.

$1,118

$2,086

$3,090

$4,139

$5,231

$6,369

$7,554

$45 $128 $252

$417 $627

$881 $1,183

$968 $1,004 $1,049 $1,092 $1,138 $1,185

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

ProjectedCumulativeOperating Surplus


Projected AnnualOperating Surplus

228

Figure 12.10 - Key Comparison Variable: Restoration of the MRCC’s financial assets over extended budget forecast period 2013/14-2019/20 (Minimum Operating Surplus requirement @ 1.0 %) ($’000)

Commentary: - Note: During 2013/14-2016/17 the MRCC’s financial assets are projected to grow at an average annual rate of 2.2147 % as per projections

in the MRCC Budget 2013/14 (p.53). It has been assumed that this average annual growth rate will continue through to 2019/20 – there is no data in the MRCC Budget 2013/14 document that indicates that this will or will not be the case.

- Under the proposed remedial budget, there will be a significant restoration of the MRCC’s financial assets over the extended budget forecast period as a result of annual contingency fund and minimum operating surplus requirements set at 1.0 % and 2.0 % (or 1.0 % under the proposed ‘fall-back’ scenario) of projected total operating cash inflows respectively.

$16,436

$16,786 $17,149 $17,528 $17,916 $18,313 $18,719 $18,672 $20,608

$22,616 $24,714

$26,898

$29,174

$31,544

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

Projected financialassets: MRCCBudget 2013/14

Projected FinancialAssets: ProposedSustainableBudget Strategy(Fall-backscenario)

229

Figure 12.11 – Summary of Sensitivity Analysis: Impact of a 1.0 % change in Key Budget Variables upon projected operating result ($’000)

Note: * The impact of a 1.0 % change in annual depreciation allocations - for example, increasing the annual depreciation allocation from 2.5 % of IPPE Assets to 3.5 % of IPPE Assets - ** The impact that a change in new borrowings will have upon annual operating results (and overall indebtedness) - $171 000 – is based upon a change in initial indebtedness by $1.0 million (as opposed to 1.0 %). The $171 000 is the projected change in annual debt servicing payments that will accompany a change in overall indebtedness by $1.0 million (based upon a weighted average interest rate of 6.22 %).

The data presented in Figure 12.11 clearly highlights that the Rate Base growth rate and annual depreciation allocations are the two most significant variables in-so-far as the impact of a 1.0 % change is projected to have upon projected annual operating results.

$2,297

$859 $1,079 $1,079

$3,213

$1,079

$438

$171

$777

$151

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Rate Basegrowth rate

Non-Rate Baserevenue growth

rate

Productivitydividend

Annualcontingency fund

allocation

Annualdepreciationallocation*

MinimumOperating

Surplusrequirement

Capitalexpendituregrowth rate

Newborrowings**

Debt term(increase from7.5 to 10 years)

Weightedaverage interest

rate on debt

230

Table 12.12 - Summary: Projected minimum savings required to achieve budget objectives ($’000)

Scenario:


2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

MRCC Budget 2013/14 - - - - - - -

Sustainable Budget Strategy – Preferred Option 8453 7859 7849 7819 7706 5371 411

Sustainable Budget Strategy – Fall-back Option 7335 6890 6845 6770 6614 4234 -774

Transitional Strategy 1 7335 6890 6845 6770 6614 4234 -774






Transitional Strategy 7 6558 5418 4633 4523 4330 1912 -3134 1 A ‘negative’ number indicates that the proposed remedial budget allows for a level of expenditure that is greater than the MRCC’s current budget projections. 2 RB – Annual Rate Base growth rate; OS – Minimum required Operating Surplus; Non-RB – Annual Non-Rate Base growth rate. How can these savings be achieved?

1. Introducing an organization-wide productivity dividend of 3.0 % combined with new non-rate revenue growth of $4.7 million – see Figures 12.13 – 12.15;

2. Reducing EFT staffing numbers by 7.0 % (35.28 EFT) combined with new non-rate revenue growth of $4.7 million – see Figures 12.16 – 12.17;

3. A series of targeted cost reduction and revenue raising measures that will yield savings of $6.7 - $7.8 million – see Figure 12.18; 4. A combination of strategies 1 – 3. Significantly: All of the above cost-reduction and non-rate revenue raising strategies can be introduced with minimal impact upon the MRCC’s on-ground service delivery.

231

Table 12.13 – Introducing an across-the-board / organization-wide budget cut ($’000)

Size of uniform budget cut

Projected cost savings and/or revenue growth

2014/15 2015/16 2016/17

Total Operating Cash Inflows 95 568 99 884 104 453

1.0 % 956 1 000 1 045

2.0 % 1 912 2 000 2 090

3.0 % 2 868 3 000 3 135

4.0 % 3 824 4 000 4 180

5.0 % 4 780 5 000 5 225

6.0 % 5 736 6 000 6 270

7.0 % 6 692 7 000 7 315

8.0 % 7 648 8 000 8 360

NOTES: Note 1 – The uniform budget cut is based upon Total Operating Cash Inflows and allocated internal budgets on a cash basis. As such, non-monetary (‘book entry’) savings are excluded from the process. Note 2 – There is no prioritization of activity areas – all activity areas are treated the same regardless of their current level of efficiency and/or regardless of the value of the activity to the organization and/or community. Note 3 – In relation to individual internal departments or activities, department or activity managers may or may not receive directives or guidelines in relation to any prioritization to be made for achieving identified savings requirements within each department or activity area. Note 4 – Allowing individual department or activity managers to exercise their own discretion in relation to how identified savings requirements will be achieved may result in unintended or sub-optimal outcomes – the author’s preferred approach would be to at least have minimum guidelines for individual department or activity managers to follow in relation to how identified savings requirements are to be achieved.

232

Table 12.14 – Increasing non-rate revenue streams ($’000)

Size of uniform budget cut


2014/15 2015/16 2016/17

1. Capital grants – Unknown 1 000 1 000 1 000

2. User Fees & Charges – Average has been $6.033 million p.a. (2010/11-2012/13): - 5.0 % - 10.0 % - 15.0 % - 20.0 % - 25.0 % - See Note 1.

302 604 906

1 208 1 510

302 604 906

1 208 1 510

302 604 906

1 208 1 510

3. Disposal of excess assets - Potential range

Average annual proceeds from disposal of assets during 2009/10-2012/13 - $993.

1 000 - 2 000

1 000 - 2 000

1 000 - 2 000

4. ‘Community Futures’ investment levy – see Note 2: - $10 - $20 - $30 - $40 - $50

Projected revenue figures based upon 30 660 rateable properties across MRCC municipality.

307 613 920

1 226 1 533

307 613 920

1 226 1 533

307 613 920

1 226 1 533

Total potential non-rate revenue growth 4 741 4 741 4 741

NOTES: Note 1 – User Fees & Charges - Alternatively, a ‘staged’ increase in User Fees & Charges could be introduced – that is, instead of a 20 % increase in first year, introduce a 7.5 % – 12.5 % increase over 3 successive years. A range of options should be considered so as to balance need to increase non-rate revenue against managing impact upon the community. Note 2 – Imposition of an annual $10 - $50 ‘Community Futures’ investment levy for all rateable properties for a fixed 5-year term. Levy will not be subject to CPI indexation for duration of the 5-year term and must be allocated to the funding of capital expansion initiatives only. The ‘Community Futures’ investment levy is to be reviewed at end of initial 5-year term with the view to discontinuation or potential continuation into the future.

233

Table 12.15 – Netting off projected growth in non-rate revenue streams to determine minimum organization-wide budget cut ($’000)

Projected minimum organization-wide budget cut

2014/15 2015/16 2016/17

Projected minimum required savings – sustainable budget strategy (Part 10) 7 859 7 849 7 819

SCENARIO 1:

Projected non-rate revenue growth – Table 12.14 4 741 4 741 4 741

Minimum organization-wide budget cut 3 118 3 108 3 078

Organization-wide budget cut – 3.0 % - Table 12.13 2 868 3 000 3 135

Difference 250 108 57

SCENARIO 2:

Projected non-rate revenue growth – Table 12.14 adjusted for $1 000 short-fall in projected non-rate revenue growth each year:

4 741 (1 000) 3 741

4 741 (1 000) 3 741

4 741 (1 000) 3 741


Organization-wide budget cut – 4.0 % - Table 12.13 3 824 4 000 4 180

Difference 294 108 102

The analysis presented in Table 12.12.3 reveals that:

(i) If projected non-rate revenue growth targets are realised, they would need to be accompanied by an organization-wide budget cut

of 3.0 % in order to achieve the minimum savings required under the proposed sustainable budget strategy;

(ii) If there was a $1 000 short-fall in projected non-rate revenue growth targets, they would need to be accompanied by an

organization-wide budget cut of 4.0 % in order to achieve the minimum savings required under the proposed sustainable budget

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Table 12.16 – Reducing EFT Staffing numbers ($’000)

Size of reduction in EFT staff numbers


2014/15 2015/16 2016/17

Projected Employee Cost Expenditures3 40 848 43 105 45 485

1.0 % (EFT – 5.04) 408 431 455

2.0 % (EFT – 10.08) 817 862 910

3.0 % (EFT – 15.12) 1 225 1 293 1 365

4.0 % (EFT – 20.16) 1 634 1 724 1 819

5.0 % (EFT – 25.2) 2 042 2 155 2 274

6.0 % (EFT – 30.24) 2 451 2 586 2 729

7.0 % (EFT – 35.28) 2 859 3 017 3 184

8.0 % (EFT – 40.32) 3 268 3 448 3 639

9.0 % (EFT – 45.36) 3 676 3 879 4 094

10.0 % (EFT – 50.4) 4 085 4 311 4 549

11.0 % (EFT – 55.44) 4 493 4 742 5 003

12.0 % (EFT – 60.48) 4 902 5 173 5 458

NOTES: Note 1 – There is no prioritization of activity areas – all activity areas are treated the same regardless of their current level of staffing and/or regardless of the value of the activity to the organization and/or community. Note 2 – In relation to individual internal departments or activities, department or activity managers may or may not receive directives or guidelines in relation to any prioritization to be made for achieving identified labour cost savings requirements within each department or activity area. Note 3 – Allowing individual department or activity managers to exercise their own discretion in relation to how identified savings requirements will be achieved may result in unintended or sub-optimal outcomes – the author’s preferred approach would be to at least have minimum guidelines for individual department or activity managers to follow in relation to how identified savings requirements are to be achieved.

3 Based upon MRCC’s projected cash expenditures on employee costs over budget forecast period (MRCC Budget 2013/14, p.52). Employee cost figures from projected Income Statement for budget forecast period are (‘000): 2014/15 - $41 482; 2015/16 - $43 764l; and 2016/17 - $46 171 respectively (MRCC Budget 2013/14, p.54).

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Table 12.17 – Netting off projected growth in non-rate revenue streams to determine minimum EFT Staffing reduction ($’000)

Projected minimum organization-wide budget cut

2014/15 2015/16 2016/17

Projected minimum required savings – sustainable budget strategy (Part 10) 7 859 7 849 7 819

SCENARIO 1:

Projected non-rate revenue growth – Table 12.12.5 4 741 4 741 4 741


Reduction in EFT staffing numbers – 7.0 % - Table 12.12.4 2 859 3 017 3 184

Difference 259 91 -106

SCENARIO 2:

Projected non-rate revenue growth – Table 12.12.5 adjusted for $1 000 short-fall in projected non-rate revenue growth each year:

4 741 (1 000) 3 741

4 741 (1 000) 3 741

4 741 (1 000) 3 741


Organization-wide budget cut – 10.0 % - Table 12.12.4 4 085 4 311 4 549

Difference -33 -203 -471

Note: ‘Negative’ numbers indicate actual reduction in EFT staffing numbers would be slightly less than 8.0 % or 10.0 % (as the case may be for

Scenario 1 and Scenario 2 respectively).

The analysis presented in Table 12.12.3 reveals that:

(iii) If projected non-rate revenue growth targets are realised, they would need to be accompanied by an organization-wide budget cut

of 3.0 % in order to achieve the minimum savings required under the proposed sustainable budget strategy;

(iv) If there was a $1 000 short-fall in projected non-rate revenue growth targets, they would need to be accompanied by an

organization-wide budget cut of 4.0 % in order to achieve the minimum savings required under the proposed sustainable budget

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Table 12.18 – Summary of potential cost saving and revenue growth initiatives for the MRCC: First Iteration ($’000) Initiatives


2014/15 2015/16 2016/17

Employment initiatives – introduction of job-flexibility arrangements with aim of reducing annual employee costs by 1.0 % per annum

408

431

455

Employment initiatives – Reduce employment numbers by minimum of 2.0 – 3.0 EFT:

- Reduction of staff numbers equivalent to 2.0 % EFT – OR – - Reduction in staff numbers equivalent to 3.0 % EFT

817

1 225

862

1 293

910

1 365

Plant & Equipment acquisition / expenditures – a range of initiatives aimed at reducing annual Plant & Equipment expenditures by 30 % (A) (Refer to ‘B’ below)

1 020

1 020

1 020

Disposal of land on corner of Deakin Avenue and 16th Street 1 000

Improvements in materials / equipment supply arrangements – a range of initiatives aimed at reducing annual materials / equipment supply expenditures by:

- 1.0 % – OR – - 2.0 % - Preferred option – OR – - 3.0 %

354 708

1 062

368 736

1 104

383 766

1 149

Increase User Fees & Charges by 20 % across the board 1 207 1 207 1 207

Reduction in MRCC vehicle fleet costs by 40 % - 50 % (B) (Refer to ‘A’ above) 880 – 1 100 880 – 1 100 880 – 1 100

Return Mildura Arts Centre to breakeven operating performance 378 - -

Increase NET capital grants income by $1.0 million per annum 1 000 1 000 1 000

Annual productivity dividend to be imposed:

- 1.0 % – OR – - 1.5 % - Preferred option - Less (i) Savings from flexible employment initiatives - Less (ii) Savings from 1.0 % reduction in materials / equipment supply

968

1 452 (408) (354) 690

1 004 1 506 (431) (368) 707

1 049 1 573 (455) (383) 735

Introduction of a Community Investment Levy to be used to partially fund new capital expansion programs – levy to be in place for 5-year period:

- $50 per rateable property

1 533

1 533

1 533

Increased annual debt servicing payments (777) (777) (777)

Total $ 7 984 - $ 8 864 $ 6 719 - $ 7 599 $ 6 849 - $ 7 729

To avoid ‘double counting’ these savings

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Table 12.19 – An evaluation of the sustainable budget strategy for the MRCC against 12 key budget principles

Budget Principle Proposed Sustainable Budget Strategy for the MRCC

1. Extended budget forecast period of 7 years An extended 7-year budget forecast period is used (2013/14-2019/20)

2. Cash-based revenue and expenditure forecasts Sustainable budget strategy is based upon cash inflows and expenditures

3. Balanced budget after capital grants, non-monetary items and adjustments, changes in depreciation allocation rates, new borrowings and the liquidation of assets

Sustainable budget strategy adheres to annual balanced budgets on a cash flow basis. There are no projected Net Cash Deficits in the extended budget forecast period.

4. Risk management should be incorporated into the budget process Annual Contingency Fund allocations combined with annual Minimum Operating Surplus requirement will position MRCC to respond to unforeseen circumstances without having to resort to new borrowings. A comprehensive sensitivity analysis has been provided as an accompaniment to the proposed sustainable budget strategy.

5. Target Costing-based budgeting model should be used Sustainable budget strategy is based upon a Target Costing-based model.

6. Keeping a tight rein on expenditure growth Expenditure growth is capped at maximum annual budget parameters.

7. Keeping a tight rein on Interest Bearing Debt levels and terms MRCC’s projected debt in 2019/20 will be $1.889 million, compared to a projected $29.071 million under the MRCC’s existing budget strategy. This will result in net interest cost savings of $27.891 - $33.064 million.

8. Capital investment should be measured and kept within parameters that do not necessitate excessive debt financing

Annual capital expenditure growth rate capped at 2.5 %.

9. Annual depreciation allocations must be fully funded and sufficient to cover all capital renewal and upgrade expenditures

Annual depreciation allocations fully funded and set at 3.25 % of IPPE Assets – sufficient to fully fund all capital renewal and upgrade expenditures throughout the budget forecast period without resorting to debt financing.

10. Annual rate levy increases should be capped at the lower of 2.5 % per annum or the CPI growth rate

Sustainable budget strategy based upon annual rate levy increases being capped at 2.5 %.

11. User fees and charges should reflect full-cost recovery User Fees & Charges will be initially increased by 20 % with the aim of better reflecting a full-cost recovery model in accordance with Victorian Auditor General guidelines.

12. Capital grants should not be accepted where there is tangible evidence of cost-shifting by other spheres of government (State or Federal)

Sustainable budget strategy advocates more stringent due diligence processes to ensure that the MRCC’s finances are not unduly affected by costing shifting from State of Federal spheres of government.

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14 Key (non-negotiable) Budget Principles for the MRCC

There are 14 key budget principles upon which the proposed sustainable budget strategy

presented in this chapter has been based. The 14 key budget principles have been designed

with a local Council’s long-term financial sustainability in mind – the extent to which the

following budget principles are compromised is the degree to which the long-term financial

sustainability of a local Council will be undermined.

The 14 key budget principles include:

a. A target-costing approach to budgeting must be adopted;

b. Expenditure growth must be kept within parameters of the Underlying Revenue

and/or Operating Cash Inflow and/or Net Operating Cash Inflows growth rate;

c. An annual productivity dividend equivalent to 1.0-2.5 % be introduced;

d. Depreciation allocations must be fully funded and restored to at least 3.25 % of

depreciable assets (in order to ensure that annual capital renewal / upgrade

expenditures are fully funded from operations) with the view to increasing this

allocation to 3.5 % in the medium-term if deemed necessary;

e. An annual ‘contingency fund’ contribution equivalent to 1.0 % of annual Underlying

Revenue and/or Net Operating Cash Inflows to be made prior to capital works and

on-going operating budgets are determined;

f. The annual operating budget must be balanced after capital grants are taken into

account in the absence of new borrowings or liquidation of assets;

g. Capital grants should not be accepted where there is tangible evidence of cost-

shifting by other spheres of government (State or Federal);

h. A moratorium on new borrowings throughout the budget forecast period (2013/14-

2016/17) be introduced;

i. The MRCC’s outstanding debt portfolio as at 30 June 2013 ($23.133 million) be re-

financed to a maximum of 7.5 - 10 year term;

j. The maximum loan term for any new borrowings be limited to 5 - 7.5 years;

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k. Interest bearing debt levels to be kept below maximum threshold of 20 % of

Underlying Revenue less Capital Grants;

l. Rate increases must be restricted to a maximum of 0.0 - 2.5 % per annum in line with

the Reserve Bank of Australia’s (RBA’s) inflation target;4

m. The MRCC must move toward a full cost-recovery model for subsidized services; and,

n. The MRCC must look at ways of growing non-Rate Base revenue streams over the

budget forecast period by at least 2.5 – 7.5 % per annum.

4 The official inflation target for the RBA is to keep inflation within the 2.0-3.0 % range, with the mid-point of

2.5 % or less being the preferred outcome.

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Summary of key findings – Chapter 13: An evaluation of metered parking as a

non-rate revenue source

Based upon the analysis and discussion presented in this chapter, a number of key points

and/or recommendations need to be highlighted:

1. The introduction of metered parking within the ‘core’ CBD area (bordered by Madden

Avenue, 7th Street, Lime Avenue and 9th or 10th Streets) would result in an increase in

parking occupancy turnover due to parking in the immediate surrounding CBD area

being non-metered;

2. The effectiveness of metered parking as a revenue raising mechanism will be dependent

upon a range of factors, four of which include (i) the price (per metered parking day or

part thereof); (ii) the number of metered parking bays and associated average

occupancy rate; (iii) the price sensitivity of motorists; and (iv) the availability and

proximity of viable non-metered parking options. Restricting the availability and/or

proximity of non-metered parking options is absolutely crucial if the purpose of

introducing metered parking is to raise revenue;

3. Four cities within the G18 peer group of local Councils have metered parking services in

place: the Cities of Ballarat, Bendigo, Geelong, and Shepparton revenue from Parking

Fees, Fines and Charges accounted for between 1.11 – 3.07 % of Total Operating Income

during 2011/12 and 2012/13;

4. For the City of Greater Shepparton, which has a resident population of approximately 60

000, metered parking revenue (from ticket machines and parking meters) for 2011/12

and 2012/13 financial years amounted to a combined $1.244 and $1.274 million

respectively (representing 1.11 % and 1.15 % of Operating Income for 2011/12 and

2012/13 respectively);

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5. Based upon data sourced from the Cities of Geelong, Ballarat, Bendigo and Shepparton,

the Correlation Coefficient and R-Square values suggest a relatively strong relationship

exists between a local Council’s revenue from parking fees, fines and charges and

resident population;

6. There are many issues that need to be considered before any decision to introduce

metered parking services could be made. These considerations include (but are not

limited to) the following:

a. The availability and proximity of non-metered parking options;

b. Whether or not there will be differential metered zones within designated metered

parking areas – that is, will more centrally located metered parking bays attract a

higher per day (or part thereof) fee?;

c. Whether or not there will be designated ‘free’ parking spaces within designated

metered parking areas – for example, for disabled and/or elderly citizens, or for

gaining access to particular services (medical);

d. Whether or not there will be an allocated ‘free time’ – for example, the first 10

minutes for any parking customer – and whether or not an allocated ‘free time’ will

be specific to particular metered parking zones or bays or whether it would apply

across all metered parking zones;

e. The actual type and number of parking meters to be installed; and,

f. The pricing structure of metered parking services.

7. In order to minimize any disproportionate displacement effect between the Mildura CBD

and 15th Street retail precinct, and to significantly enhance the revenue raising potential

of metered parking services, metered parking services would need to be introduced

across both locations simultaneously;

8. There are a number of options available in relation to metered parking. Principally these

options vary in relation to two key factors:

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The physical presence or distribution of metered parking machines – ranging from

individual (‘one-on-one’) meters for each metered parking bay, ‘centralised’ metered

parking stations, or a wholly electronic ‘portable’ system using mobile (dash-board)

parking sensors; and,

The means of payment for parking in a metered parking bay – cash, EFT POS (Debit /

Credit / Other Card), wholly electronic (as per the technology used for toll roads – for

example, Citi-link in Melbourne), or a combination of some or all of these options.

9. The installation of ‘centralised’ metered parking stations with the option of both cash

and EFT POS payment methods appears to be the most appropriate metered parking

option available as it provides a parking customer with two payment options (even

though an ‘EFT POS-only’ facility would have reduced annual revenue collection costs);

10. A number of parking studies commissioned by the MRCC in 1998 and 2005 indicated

average occupancy rates of between 68 – 72 % in the Mildura CBD area. These

occupancy rates were not too dissimilar to the findings of other CBD parking studies

conducted in Ballarat, Bendigo and Shepparton. Three key points need to be

highlighted:

Parking bay occupancy rates will vary according to location and time, with ‘peak’

occupancy rates likely to be located near highly frequented retail and non-retail

precincts;

‘Peak’ occupancy rates are likely to occur on Thursdays, Fridays and Saturday

mornings; and,

The introduction of metered parking services can be expected to result in a

reduction in the average daily occupancy rate – the extent of this reduction is

unknown - although with non-metered occupancy rates at around 70 %, it would

be reasonable to assume that the average daily occupancy rate would be

retained above 40 % - 50 % upon the introduction of metered parking services

due to the relative inelasticity of demand for parking facilities.

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11. In a study conducted for the City of Ballarat in 2011 where metered parking services

have been in place for many years, two distinct cohorts of parking customers were

identified:

(i) Customers involved in shopping and/or other activities which required a visit to

the CBD area – the majority of these customers occupied parking bays for up to

one hour; and,

(ii) Customers who worked in the greater CBD area and who therefore utilized

parking bays where day-long metered parking was available.

These findings – although based upon a parking survey study focussed upon the Ballarat

CBD – do appear to be in line with what one would tend to expect to find in relation to

CBD parking behaviour: relatively shorter-term parking bay occupancy times for

customers involved in shopping or other shorter-term trips, and day-long parking bay

occupancy times for those who work in the CBD area.

12. The parking behaviour noted in Point 11 (above) suggests that metered parking revenue

will be optimised through:

- Restricting any ‘free time’ to maximum of 10 minutes for only a limited number of

specified parking bays;

- The initial charge for first 30-60 minutes be substantially greater than 1/7th or 1/8th

of daily rate;

- A progressive hourly charge beyond first hour should increase at a low incremental

rate;

- Discounted day-long parking rates (with weekly or monthly ‘packages’) will reduce

propensity for day-long customers to seek alternative means of transport and/or

search for alternative non-metered parking options.

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13. The key to maximising revenue from metered parking is to match the pricing structure

with the demand patterns for parking bays in terms of location and average occupancy

times;

14. The recommended pricing strategy for metered parking services across the Mildura CBD

and 15th Street retail precincts should incorporate the following characteristics:

Any ‘free time’ designation be limited to 10 minutes for a limited number of parking

bays for specific purpose;

A progressive rate to be biased such that the parking fee for the first 2 hours is

equivalent to 40 % of equivalent day-long charge; and,

Day-long users should be granted a discounted rate on a weekly or monthly basis.

15. Modelling of a range of scenarios suggests that a minimum daily charge for metered

parking services across the Mildura CBD and 15th Street retail precinct be in the range of

$3.75 - $6.25;

16. Not surprisingly, the financial returns generated from metered parking services across

the Mildura CBD and 15th Street retail precinct will depend upon a range of variables,

including (i) the daily parking charge; (ii) the average daily occupancy rate; (iii) the

number of parking bays subjected to metered parking; and (iv) the availability and

proximity of non-metered parking options. A summary of selected scenarios is

presented in Figures 1 - 3;

17. A sensitivity analysis of three key revenue variables (daily charge, average daily

occupancy rate, and the number of metered parking bays) found that the daily charge

and average daily occupancy rates were the two most sensitive variables in terms of

their potential impact upon projected financial results;

18. A sensitivity analysis of three key cost variables (cost of metered marking stations,

installation costs, and the relative dispersion of metered parking stations) found that the

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relative dispersion of metered parking stations was a significant variable in terms of its

potential impact upon projected financial results;

19. The MRCC has the option of retaining responsibility for establishing and operating

metered parking services across the Mildura CBD and 15th Street retail precinct, or out-

sourcing metered parking services to a 3rd party specialist parking services provider.

Many local Councils across Australia have opted for the latter option;

20. Out-sourcing metered parking services will enable the MRCC to avoid initial capital

investment requirements needed to establish metered parking services across the

Mildura CBD and 15th Street retail precinct, but the overall returns to the MRCC over a

10-year term will lower compared to a scenario in which the MRCC retained

responsibility for establishing and operating metered parking services across the Mildura

CBD and 15th Street retail precinct – it is ultimately a cost benefit decision that the MRCC

must make in the light of available evidence;

21. The projected revenue generating capacity of the MRCC’s metered parking asset is likely

to be in the range of $1.087 (@ $3.75 per day) - $2.415 million (@ $6.25 per day)

depending upon the actual values of key variables – a summary of selected scenarios is

presented in Figure 4;

22. The projected breakeven point in terms of average daily occupancy rate of the MRCC’s

metered parking asset is likely to be in the range of 30 % (@ $3.75 per day) – 17 % (@

$6.25 per day) depending upon the actual values of key variables – a summary of

selected scenarios is presented in Figure 5;

23. The projected Net Operating Result of the MRCC’s metered parking asset is likely to be

in the range of $116 572 (@ $3.75 per day) - $1.408 million (@ $6.25 per day)

depending upon the actual values of key variables – a summary of selected scenarios is

presented in Figure 6;

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24. The projected Return on Investment (ROI) of the MRCC’s metered parking asset is likely

to be in the range of 3.42 % (@ $3.75 per day) – 41.30 % (@ $6.25 per day) depending

upon the actual values of key variables – a summary of selected scenarios is presented in

Figure 7;

25. The projected Payback Period of the MRCC’s metered parking asset is likely to be in the

range of 29.24 years (@ $3.75 per day) – 2.42 years (@ $6.25 per day) depending upon

the actual values of key variables – a summary of selected scenarios is presented in

Figure 8;

26. The projected 10-year contract value of the MRCC’s metered parking asset, based upon

a Required Rate of Return equivalent to 8.0 % per annum, is likely to be in the range of

$719 623 (@ $3.75 per day) - $8.690 million (@ $6.25 per day) depending upon the

actual values of key variables – a summary of selected scenarios is presented in Figure 9;

27. From an investment / financial returns perspective, and based upon (i) a contractual

arrangement under which the MRCC was guaranteed an annual dividend equivalent to

8.0 % of Net Operating Results over a 10-year period; and (ii) both the 3rd party specialist

parking services provider and the MRCC having a minimum Required Rate of Return of

8.0 %, the MRCC would be indifferent to either retaining responsibility for the provision

of metered parking services or out-sourcing to a 3rd party. The analysis presented in

Table 10 supports this view – with the Net Present Value (NPV) of each scenario being

the same;

28. The most significant point to note from the analysis presented in Table 10 is that the Net

Present Value (NPV) for metered parking services across the Mildura CBD and 15th Street

retail precinct is projected to be in the order of $5.507 - $6.295 million based upon

either (i) a daily charge of $3.75 and an average daily occupancy rate of 50 %; (ii) a daily

charge of $5.00 and an average daily occupancy rate of 40 %; or (iii) a daily charge of

$6.25 and an average daily occupancy rate of 30 % (see highlighted sections of Table 10);

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29. It is acknowledged that the financial modelling presented throughout this chapter is

based upon a range of underlying assumptions as noted throughout – any changes to

underlying assumptions will impact upon subsequent projections. However, the author

is of the view that these projected figures are significant enough to warrant further

detailed analysis / consideration. This is particularly so given the MRCC’s current and

projected financial status.5

30. The cost of metered parking services to individual parking customers will vary depending

upon the number and average length of parking occupancies. An analysis of three

‘typical’ scenarios suggests that the introduction of metered parking services across the

Mildura CBD and 15th Street retail precincts would cost approximately $3.00 - $6.00 per

week. For regular day-long users, the weekly cost would be in the range of $9.38 -

$12.50 depending upon the size of discount offered for a Weekly Pass – see Figures 11

and 12;

31. If the MRCC was to proceed with the introduction of metered parking services across the

Mildura CBD and 15th Street retail precincts, it is recommended that a maximum cap be

placed on regular day-long users equivalent to $12.50 per week;

32. As can be expected, there are a number of non-financial pro’s and con’s associated with

the MRCC out-sourcing metered parking services to a 3rd party specialist parking services

provider. A number of these considerations have been summarised in Table 13;

33. The introduction of metered parking across the Mildura CBD without a simultaneous

roll-out of metered parking across the 15th Street retail precinct would result in a

significant displacement effect as potential metered parking customers opt to undertake

their retail shopping at the 15th Street retail precinct. This will have a significant impact

upon retail trade across the Mildura CBD and lead to a reduction in the value of business

properties accordingly. A reduction in the value of business properties will have

5 Characterised by increasing indebtedness, a significant deterioration in solvency (and therefore a

deterioration in the capacity to service debt), expenditure growth that is projected to exceed Underlying Revenue growth over the budget forecast period, and with 5 of 6 non-rate sources of income projected to contract over the budget forecast period.

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implications for the MRCC’s rate base as the City Heart and Langtree Mall CIV base is

reduced. In essence, for every 5.0 % drop in City Heart / Langtree Mall business

property CIVs, the MRCC’s rate income will be reduced by $109 000. Thus, a 20.0 %

drop in City Heart / Langtree Mall property CIVs will result in reduced annual rate

income for the MRCC equivalent to $436 213. This must be off-set against any net

revenue produced from the introduction of metered parking services by the MRCC;

34. Although the introduction of metered parking services across the Mildura CBD and 15 th

Street retail precinct has the potential to be a significant revenue raising mechanism and

would yield potentially significant Net Operating Results for the MRCC, it is

fundamentally a very inefficient form of taxation given the size of the associated dead

weight loss associated with metered parking services. In effect, the cost to the

community would significantly outweigh the actual dollar benefits generated by the

MRCC in order to fund on-going service delivery. On this basis alone the author is of the

view that metered parking services not be introduced if the express purpose behind

such a move was to raise revenue.

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