Financial management (sustainability) guideline 2009

1,995
-1

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
1,995
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
48
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Financial management (sustainability) guideline 2009

  1. 1. Financial management (sustainability) guideline 2009 Support for the development of local government ten year financial models, including long-term sustainability strategies as well as indicators and measures for the assessment of ongoing local government sustainability.
  2. 2. Contents Introduction .................................................................................................................................. 3 Sustainability and reporting ................................................................................................... 3 Evaluation process ................................................................................................................. 3 Information return..................................................................................................................4 Queries..................................................................................................................................4 Sustainability and reporting .......................................................................................................... 5 Integrated approaches—the national frameworks....................................................................6 The elements .........................................................................................................................6 Asset management.................................................................................................................6 Community engagement......................................................................................................... 7 Governance ........................................................................................................................... 7 Financial management (sustainability) ....................................................................................8 Value proposition..........................................................................................................................9 Measures of sustainability ...........................................................................................................11 Targets ....................................................................................................................................... 12 Explanation of measures ............................................................................................................. 13 Introduction......................................................................................................................... 13 Definitions .................................................................................................................................. 15 Ten year financial models .............................................................................................................17 Construction ........................................................................................................................ 18 Additional references ........................................................................................................... 18 Attachment 1—Reference group ................................................................................................... 19 Attachment 2—Measures of sustainability ...................................................................................20 Sustainability defined .......................................................................................................... 20 The selection of measures .................................................................................................... 21 Assessing financial sustainability—The national frameworks ................................................. 23 Enhanced national frameworks............................................................................................. 25 Enhanced national framework on asset planning and management ................................... 25 Enhanced national framework on financial planning and reporting .................................... 29 2
  3. 3. Introduction Sustainability and reporting The Department of Infrastructure and Planning has developed a sustainability and reporting process for Queensland local government emphasising sustainable communities and councils. This will assist in achieving a consistent approach to assessing the financial sustainability of councils, including the ability to assess where support may be needed. In March 2007, the Local Government and Planning Ministers’ Council endorsed national frameworks for assessing financial sustainability, asset planning and management, and financial planning and reporting. Queensland has included the implementation of the national frameworks within local government as part of the sustainability and reporting process. This process requires councils to provide information periodically on specific areas associated with governance and accountability, planning, asset management and financial performance management. This guideline assists councils in the development of ten year financial models. It has supporting indicators and measures that allow councils to assess their sustainability. It also assists in the development of a sustainability strategy that aims to ensure council’s long-term sustainability. The guideline includes an information return that indicates the financial data to be provided to the department for evaluation. Evaluation process The evaluation process is designed to support councils in promoting good practice and identifying strengths and weaknesses in current planning and decision making processes. The information return is to be provided to the department for evaluation. The department will provide the council with a formal response following the completion of the evaluations. The sustainability and reporting process applies to all mainstream Queensland councils and the Torres Strait Island Regional Council. In the medium term, it will apply to all local councils in Queensland. 3
  4. 4. Information return The annual sustainability and reporting evaluation program is as follows: Q1—July to September Asset management Q2—October to December Governance, including financial planning and reporting Community engagement Q3—January to March Financial management (sustainability) Q4—April to June Support to councils in need of assistance The sustainability and reporting process is being implemented for the first time in 2009 and will transition to the above timetable in 2010 and 2011. The financial management (sustainability) component of the information return will be issued separately to this guideline. Queries Queries can be directed to: Assistant Director-General Local Government and Planning Group Department of Infrastructure and Planning PO Box 15009 City East QLD 4002 Director Performance Measurement and Reporting Local Government and Planning Group Department of Infrastructure and Planning lgenquiries@dip.qld.gov.au 4
  5. 5. Sustainability and reporting The sustainability and reporting process includes the implementation of the national frameworks for sustainability, a national initiative to improve the ongoing sustainability of local governments throughout Australia. The national frameworks promote three main ideas: • long-term asset management and reporting • financial management and reporting • integrated planning (including budgeting). Progress on the implementation of the national frameworks is reported to the Local Government and Planning Ministers’ Council on a regular basis. The process incorporates the national frameworks within a monitoring process that covers sustainability, community engagement and good governance. In March 2009, the Local Government and Planning Joint Committee discussed enhanced local government asset management and financial planning frameworks that build on previous frameworks to provide additional detail and implementation timeframes. The enhancement of the national frameworks and acceleration of their implementation proposes a consistent approach to asset management and financial reporting is taken by all local governments from 31 December 2009. This will provide a consistent picture of the financial position of local government, including its asset management task, across Australia. The chairperson of the Local Government and Planning Ministers' Council informs the chairperson of the Council of Australian Governments on the progress of the initiative and its implementation within each state and territory. It is proposed that each state and territory begin implementation of the enhanced frameworks in their local government sectors by 31 December 2009 and achieve substantial progress towards full implementation by 31 December 2010. The new sustainability and reporting process of the Department of Infrastructure and Planning incorporates the national frameworks but has a broader emphasis on the sustainability of councils and communities. Councils across Queensland will need to raise current standards of asset planning and forecasting in order to manage the expected growth and adequately deal with the commitments inherent in the current infrastructure. The implementation of the sustainability and reporting increases the accountability and transparency of local government and leads to more sustainable councils with better planning and development of infrastructure. Councils will be required to assure the department that the key planning elements are in place, that is, that the council has asset management plans and long-term strategies and forecasts, long-term financial models, corporate plans, community plans and budgets that address minimum requirements. 5
  6. 6. Integrated approaches—the national frameworks The national frameworks provide a basis for all local governments in Australia to adopt similar practices in a number of key areas. For the most part, the frameworks represent a minimum standard and does not represent more complete standards of good practice. The elements There are four different elements to the overall sustainability and reporting process: 1. asset management 2. community engagement 3. governance, including integrated financial management planning and reporting 4. financial management (sustainability)—measures of sustainability. The data obtained from the collection process will also be made available to councils and other stakeholders. The purpose of the sustainability and reporting process is to support councils in managing their community’s future. Councils continue to remain accountable to the community for the achievement of the outcomes. Asset management The department has developed an asset management policy for local government in Queensland. The policy states that all Queensland local councils are to develop and maintain long term financial plans based on sound infrastructure asset management plans for certain prescribed infrastructure asset classes and sub-classes. These long-term financial plans should cover a forward planning horizon of at least ten years and the asset management plans on which they are based should desirably cover a twenty year period. The Annual Return on the Status of Asset Management has been designed to be a simple data and information collection tool. Its purpose is to determine whether asset management plans exist for each significant asset class and sub-class and that the council has incorporated the long-term asset management requirements into the long-term financial model. The existence of asset management plans for key assets is a necessary predecessor to council having a complete long-term financial model that supports its planning and decision making processes. It is acknowledged that these plans will become more sophisticated in coming years. 6
  7. 7. Community engagement The Annual Return on Community Engagement is used to determine whether councils have developed formal good practice community engagement processes and whether these are being integrated with the planning processes of council. Community engagement is a necessary element in a number of themes associated with sustainability, including community planning and long-term asset management. The community engagement policy reiterates previously endorsed Local Government Association of Queensland policy, which states: “Local Government recognises that community engagement is vital to the democratic process and contributes to building balanced healthy communities. Local Government understands community engagement contains the core elements of information, consultation and active participation. Local Government will apply the core elements of community engagement, where appropriate, to facilitate meaningful community involvement in the decision-making process.” Governance The Annual Return on Governance addresses a limited number of governance elements and is used to evaluate whether certain key processes are in place to support planning and decision making associated with sustainability. The governance evaluation is comprised of a number of components: • integrated approaches to strategic planning • integrated approaches to financial management • risk management. Collaborative approaches to engaging with the community on key issues are highly regarded. This is consistent with the proposed evaluative approach to community engagement and is part of the corporate and community planning processes. The evaluation process places considerations of governance within the context of the sustainability, accountability and capability development objectives of the Local Government Act 2009. The national financial planning and reporting framework focuses on local governments’ financial management at both the strategic longer term and annual planning levels. In Queensland, the Local Government Act 2009 promotes longer term planning by councils, and includes separate but related planning requirements: • a community plan, governing a period of ten years • a corporate plan, governing a period of five years • long-term asset management plans • long-term financial plans. The sustainability and reporting process also includes a significant emphasis on community engagement as a key driver of effective planning processes. 7
  8. 8. The intent is to: • gain an understanding of the extent to which the linkages between the various financial planning processes are established and operating as expected • identify the key sustainability disclosures to be made by councils in the various planning documents, consistent with the accountability and transparency theme of the Local Government Act 2009. Financial management (sustainability) This guideline draws together various perspectives on the evaluation of sustainability in local government in order to present the evaluation elements that will be used to assess the sustainability of councils as part of the sustainability and reporting process by the department. The definition of sustainability for use in the Queensland local government sector is: • “A local council is sustainable if its infrastructure capital and financial capital is able to be maintained over the long-term.” 8
  9. 9. Value proposition The objectives of the sustainability and reporting process can be presented in terms of value to the community, to councils and to the state. The community Transparency and accountability to the community is a key emphasis of the reform program. Sustainability and reporting, in conjunction with the Local Government Act 2009, will provide for additional disclosures to the community in annual reports specifically related to matters of sustainability and governance. The community should be appropriately informed on the ongoing sustainability of the local council. Community engagement in the community planning processes of councils will be an important theme. The councils Local councils in Queensland will benefit from the issues facing individual councils. The general themes facing all councils, being identified and forming part of an informed policy development process at the state and national level. Local decision making by local councils will remain and be supported by improved data and information availability. Capacity building initiatives, specifically associated with identified gaps in capability, will over time enhance strategic and operational performance. The evaluation process will also: • allow councils to evaluate the extent to which important governance processes are in place and operating effectively • support councils in forming strategies that support the ongoing sustainability of the council. The outcomes from the evaluation process will: • highlight emerging funding and revenue issues within Queensland’s local government sector and provide a basis for the development of alternative strategies • provide statewide perspectives on the size and scale of infrastructure being managed by local government in Queensland • promote improved asset management practices within councils • consolidate on an ongoing basis the status of infrastructure management within councils • provide councils with access to comparative data and information on topics related to asset management, financial management and particular areas of governance • provide a comprehensive view of the Queensland local government sector as an important industry sector • provide for Queensland’s inclusion in comparative assessments undertaken nationally. Reports arising from the evaluation process will be provided to the mayors and chief executive officers of the individual councils concerned. 9
  10. 10. The state The state’s primary concern is the ongoing sustainability of all local councils in Queensland. For the state and the Department of Infrastructure and Planning the overarching responsibility is the system of local government in Queensland. The state and the department need to be able to develop evidence-based policy and the data, information and outcomes from the sustainability and reporting evaluation process support better policy making. Within the department, the sustainability and reporting process will provide data and information to support the development of regional perspectives and initiatives, inform capacity building activities, determine the department’s future strategic direction and relationship with local government, and provide the decision support for enhanced approaches to local government financial management policy, debt policy and grant funding arrangements. The department will seek to understand the strategies being employed by councils in order to remain sustainable and will use this understanding as a basis for assisting in developing additional capacity and capability within councils where needed. The state will intervene as necessary to support the ongoing sustainability of local councils. It will also improve the quality and usefulness of data provided for use in processes associated with the Queensland Local Government Grants Commission and other stakeholders. To this end, the sustainability and reporting process is a catalyst for greater coordination of data and information collection from local government, incorporating the Queensland Local Government Grants Commission, the consolidated data return, the Local Government Remuneration Tribunal and other monitoring activities. 10
  11. 11. Measures of sustainability The following measures are to be used to evaluate the sustainability of councils in Queensland. These measures are separately categorised as being related to the sustainability of infrastructure capital and financial capital. The current and expected level of population growth in the local government area, together with factors such as the number and type of dwellings and levels of employment and use of public transport, provide input and context to community planning and to the development of a sustainability strategy. Evaluation element Indicator Infrastructure capital sustainability Over the period of the forecast of at least ten years, with measures expressed annually and The measures are seeking to identify: on a rolling average basis: • the level of consumption of the existing • asset sustainability ratio asset base • asset consumption ratio • the level of renewal of the existing asset • asset renewal funding ratio ** base • interest coverage ratio. • the council’s capacity to fund the level of investment needed. Financial capital sustainability/viability Over the period of the forecast of at least ten years, with measures expressed annually and The measures are seeking to identify: on a rolling average basis: • the working capital capacity • working capital ratio • the financial capacity of the balance sheet • operating surplus ratio • the ongoing ability to fund operations. • net financial liabilities ratio. ** This measure will not be relevant until the infrastructure assets of the council are being managed in accordance with formal asset management plans. 11
  12. 12. Targets The table below indicates the target or target range for each of the sustainability measures. In all instances, the measures provide a preferred range. Actual values that are outside of a specific range require consideration to ensure that the overall sustainability strategy of the council is not compromised. Indicator Measure/target • the current and expected level of growth • not applicable. in the local government area. Over the period of the forecast of at least ten years, with measures expressed annually and on a rolling average basis: • asset sustainability ratio • greater than 90% • asset consumption ratio • between 40% and 80% • asset renewal funding ratio. • greater than 90%. • interest coverage ratio. • between 0% and 10%. Over the period of the forecast of at least ten years, with measures expressed annually and on a rolling average basis: • working capital ratio • greater than 1:1 • operating surplus ratio • between 0% and 15% • net financial liabilities ratio. • not greater than 60%. 12
  13. 13. Explanation of measures Introduction The table below provides additional detail on the ratios utilised and the data elements. All calculation expressions used are provided in the definitions section of this guideline. Ratio Data and calculation Information Working capital ratio Current assets divided by This is an indicator of the management of current liabilities working capital (short term financial capital). expressed as 1: X where X Measures the extent to which a council has = CA/CL. liquid assets available to meet short term financial obligations. Operating surplus ratio Net operating surplus This is an indicator of the extent to which divided by total operating revenues raised cover operational expenses revenue. Expressed as a only or are available for capital funding percentage. purposes. The operating surplus ratio is the operating surplus (deficit) expressed as a percentage of general and other rates net of (excluding) rate rebates. A positive ratio indicates the percentage of total rates available to help fund proposed capital expenditure. If the relevant amount is not required for this purpose in a particular year, it can be held for future capital expenditure needs by either increasing financial assets or preferably, where possible, reducing debt. Net financial liabilities ratio Total liabilities less This is an indicator of the extent to which the current assets divided by net financial liabilities of a Council can be total operating revenue. serviced by its operating revenues. Expressed as a percentage. A ratio greater than zero (positive) indicates that total liabilities exceed current assets. These net liabilities must be serviced using operating revenues. A positive value less than 60 per cent indicates the council has the capacity to fund the liabilities and appears to have the capacity to increase its loan borrowings. A positive value greater than 60 per cent indicates the council has limited capacity to increase its loan borrowings. 13
  14. 14. Ratio Data and calculation Information A ratio less than zero (negative) indicates that current assets exceed total liabilities and therefore the council appears to have the capacity to increase its loan borrowings. Interest coverage ratio Net interest expense on This ratio indicates the extent to which a debt service divided by council’s operating revenues are committed to total operating revenue. interest expenses. Expressed as a percentage. As principal repayments are not operating expenses, this ratio demonstrates the extent to which operating revenues are being used to meet the financing charges associated with debt servicing obligations. Asset sustainability ratio Capital expenditure on the This is an approximation of the extent to replacement of assets which the infrastructure assets managed by (renewals) divided by the council are being replaced as these reach depreciation expense. the end of their useful lives. Expressed as a percentage. Depreciation expense represents an estimate of the extent to which the infrastructure assets have been consumed in a period. Capital expenditure on renewals (replacing assets that the council already has) is an indicator of the extent to which the infrastructure assets are being replaced. This ratio indicates whether a council is renewing or replacing existing non-financial assets at the same rate that its overall stock of assets is wearing out. Asset consumption ratio Written down value of The average proportion of as new value infrastructure assets remaining in the infrastructure assets. divided by gross current This ratio shows the written down current replacement cost of value of a council’s depreciable assets relative infrastructure assets. to their as new value in up to date prices. This Expressed as a ratio seeks to highlight the aged condition of percentage. a council’s stock of physical assets. Asset renewal funding ratio The net present value of This represents the extent to which the planned capital required capital expenditures on renewals per expenditures on renewals the Asset Management Plans have been over ten years divided by incorporated into the ten year financial model the net present value of of the council. the required capital expenditures on renewals over the same period. Expressed as a percentage. 14
  15. 15. In all instances, the analysis is based on the forward ten years, assessed for the current financial period and as a trend series. Definitions The following definitions have been provided to clarify the terms used in this guideline. Term Definition Accumulated depreciation The sum of all depreciation charged against an asset since acquisition up to the current date. Capital expenditure on the IPWEA # – expenditure on an existing asset which returns replacement of assets (renewals) the service potential or the life of the asset up to that which it had originally. It is periodically required expenditure. As it reinstates existing service potential it may reduce operating and maintenance costs. Capital expenditure on the upgrade IPWEA # – expenditure which enhances an existing asset of existing assets (upgrades) to provide a higher level of service or will increase the life of the asset beyond that which it had originally. It will increase future operating and maintenance expenditures. Capital expenditure to expand the IPWEA # – expenditure that extends an existing asset, at asset base (expansion) the same standard that is currently enjoyed by residents, to a new group of users. It is discretionary expenditure which increases future operating and maintenance costs because it increases council’s asset base. Capital expenditure to expand the IPWEA # – expenditure that creates a new asset providing asset base (new) a new service to a community that did not exist beforehand. As it increases service potential, it will increase future operating and maintenance costs. Capital grants Grant funding received or receivable from a third party that relates to a capital project. Current assets All current assets as identified in the balance sheet, including cash and cash equivalents, receivables, other financial assets and current inventories. Current liabilities All current liabilities as identified in the balance sheet, including payables, leave entitlements, other current liabilities and the current amounts due for loan repayments. Depreciation expense An accounting estimate of the annual value of the reduction in value of the asset from its continued use by the council over the life of the asset. Gross current replacement cost of The current value of the infrastructure assets, expressed infrastructure assets in terms of current market value, that is, the cost to replace the existing asset in the current market. Net current assets Current assets less current liabilities. Net interest expense Interest and finance expenses as disclosed in the income statement less interest and investment revenues as disclosed in the income statement. 15
  16. 16. Net operating surplus The unadjusted operating surplus as presented in the income statement. This may be a deficit. Net present value of planned capital The total of all capital expenditures on renewals in the expenditures on renewals forecast period included in the ten year financial model, expressed in current year values. Net present value of the required The total of all required capital expenditures on renewals capital expenditures on renewals in the forecast period as indicated in the asset management plans or asset forecasts, expressed in current year values. Total debt service Current year interest expense and current year principal payments on debts. Total operating revenue The sum of all operating revenue as presented in the income statement less capital grants that have been recognised as operating revenue. Written down value of infrastructure The gross replacement cost of infrastructure assets less assets the accumulated depreciation on the infrastructure assets. IPWEA # (Institute of Public Works Engineering Australia) There are a number of additional references that will provide support to councils in gaining a better appreciation of the definitions and the use of the indicators. • IPWEA International Infrastructure Management Manual • IPWEA Australian Infrastructure Financial Management Guidelines • South Australian Local Government Financial Management Group—Financial Management Framework (www.lga.sa.gov.au). 16
  17. 17. Ten year financial models The ten year financial models should include a minimum data set, which is provided in the table below. Revenue items • rates revenue, net of discount (shown separately) • utility charges, net of discount (shown separately) • contributions • grants and subsidies • interest revenue. Expense items • human resource costs • depreciation expense • interest expense. Asset items • distinct infrastructure classes • opening and closing balances with line item movements in asset base, including revaluations • capital expenditure, classified as either renewal or new /upgrade • cash and cash equivalents • receivables, net of doubtful debts (shown separately) • total current assets. Liability items • human resource liabilities • tax liabilities • debt • payables • total current liabilities. Equity items • accumulated surplus /deficit • community equity. Statistical items • estimated annual growth in rate base • estimated annual population growth • employee numbers (establishment) for Council • average remaining term of debt • average remaining useful lives per major infrastructure asset class. Other items • annual expected loan borrowings • annual expected loan repayments (principal and interest). Queensland Treasury Corporation can provide additional guidance on the construction and content of long term financial models. 17
  18. 18. Construction The ten year financial model should be constructed as follows: • year one of the model is the current in progress budget period • years two to ten of the model are the subsequent financial periods to year one • year zero of the model should be the historical financial period immediately preceding the current budget period and be based, where possible, on the audited general purpose financial reports of the council for that period • summary data only appears on the face of the model with all supporting data provided in schedules or linking models • a schedule of asset management plans is to be a schedule attaching to the model. The schedule is to indicate the extent to which asset management plans have been developed for each of the significant asset classes identified in the Annual return on the status of asset management • Queensland Treasury Corporation provides a long term financial model/template that councils can use as the basis for the ten year model • in developing a long term financial model, there will be a number of important underlying assumptions being made. All assumptions should be documented and should form part of the long term financial model • all assumptions should be subject to sensitivity testing as part of the model development and review process. Sensitivity testing should be targeted at those items that represent the greatest risk to the council • in developing the long term financial model, the accounting policies and accounting estimates identified in note 1 Statement of Significant Accounting Policies to the General Purpose Financial Report of the council should be used. Additional references There are a number of additional references that will provide support to councils in developing financial forecasts and establishing and interpreting the measures of sustainability. • The National Frameworks for Sustainability and Enhanced National Frameworks for Sustainability • Queensland Treasury Corporation • The IPWEA International Infrastructure Management Manual • The IPWEA Australian Infrastructure Financial Management Guidelines • South Australian Local Government Financial Management Group – Financial Management Framework (www.lga.sa.gov.au) • Tropical Example Financial Statements. 18
  19. 19. Attachment 1—Reference group A reference group was established to assist in guiding the design and implementation of the sustainability and reporting process. The membership of the reference group is provided below. Michael Kinnane Chair and Associate Director-General, Department of Infrastructure and Planning Gabrielle Sinclair A/Assistant Director-General, Department of Infrastructure and Planning Chris Rose Chief Executive Officer, Logan City Council John Page Chief Executive Officer, North Burnett Regional Council John Scarce Chief Executive Officer, Torres Strait Island Regional Council Gary Stevenson Chief Executive Officer, Redland City Council Peta Irvine Chief Executive Officer, Local Government Managers Australia (Qld) Greg Hoffman Director Policy and Representation, Local Government Association of Queensland Neil Doyle General Manager, Organisational Positioning and Stakeholder Relations, Department of Transport and Main Roads Peter Way Chair of National Asset Management Strategy Committee, Institute of Public Works Engineering Australia Susan Reilly Director (Water Entities Oversight) Office of the Water Supply Regulator, Department of Environment and Resource Management Observers Debra Stolz Senior Audit Manager, Queensland Audit Office Karen Peut Executive Director, Department of Transport and Main Roads Nancy Spencer Executive Director, Strategic Policy and Legislation, Department of Infrastructure and Planning Peta Jamieson Executive Director, Service Delivery, Department of Infrastructure and Planning David Dobbs Director, Local Government Performance Taskforce, Department of Infrastructure and Planning 19
  20. 20. Attachment 2—Measures of sustainability Sustainability defined The Local Government and Planning Ministers Council suggested sustainability could be defined as “a council’s long-term financial position and performance is sustainable where planned long-term service and infrastructure levels and standards as prioritized through community engagement and consultation are met without unplanned increases in rates and charges or disruptive cuts to services”. The Commonwealth Government defines fiscal sustainability as “…a government’s ability to manage its finances so it can meet its spending commitments, both now and in the future. It ensures future generations of taxpayers do not face an unmanageable bill for government services provided to the current generation. One of the key requirements for sustainable government financial arrangements is a balanced budget over the medium to long term, given a reasonable degree of stability in the overall tax burden.” Commonwealth Government (2002). Picking apart the various elements, the key themes associated with sustainability are: • the focus is strategic and policy based • the focus is on the longer term • the strategies incorporate concepts of intergenerational equity • the core components are separately identified and assessed. The core capital components of councils could be expressed as: • financial capital—the net community equity of the council, as separately disclosed in the statement of financial position • council infrastructure capital – the non-current physical asset base of the council (property, plant and equipment). These can be more specifically defined as the major asset classes that incorporate significant service potential, that is, roads, water and sewerage assets, drains, bridges, footpaths, public buildings. Strategies for sustainability attempt to effectively manage each of the capital components individually within an integrated approach, and not manage one component successfully to the detriment of the others. The definition of sustainability for use in the Queensland local government sector is: • “A local council is sustainable if its infrastructure capital and financial capital is able to be maintained over the long term.” 20
  21. 21. There is a significant difference between measuring or reporting on the extent to which capital has been maintained and forming a view on sustainability. The extent to which capital has been maintained in a given period is a reflection of the “current state” while sustainability is a reflection of the future impacts of current policies on the current state. Sustainability is a strategy, with point in time assessments and reports being used to provide a periodic assessment of the outcome from the strategies being deployed. The periodically reported actual results provide input to an assessment of the likely success or failure of the continued use of the strategies. At this time, only the financial capital and infrastructure capital of councils has the necessary history of available data to allow current state assessments to be undertaken on a periodic basis. A separate consideration is to the extent to which a review of current capital maintenance policies can be undertaken to determine whether sustainability is likely. In terms of council capital, this can be achieved using a combination of financial, non-financial and qualitative data inputs. The national frameworks for sustainability provide a starting point for assessments of this type. The department’s definition of sustainability includes a specific emphasis on the sustainability of financial capital and infrastructure capital. Infrastructure capital refers to the productive capacity provided by the significant asset classes of the council. Measures of infrastructure capital sustainability are specifically associated with the retention of the service potential of the asset base over time. In a financial sense, the infrastructure capital is represented by the non-current assets and financing liabilities (debt financing and lease financing) of the council. Financial capital refers to the productive capacity provided by the working capital of the council, usually represented by the current assets and non-financing liabilities of the council. For both financial capital and infrastructure capital, the emphasis is on maintaining the service capacity in the long term. The sustainability principles provide the basis for the selection of appropriate measures for evaluation purposes. The selection of measures The selection of measures for use in local government in Queensland has excluded those that are based on comparisons to other councils, margins or net results, as the preference is to be able to provide councils with more definitive and stand-alone sustainability measures. Measures have been excluded where there is an inherent difficulty in expressing an objective indicator, e.g. transparency. The identified measures are consistent with those emerging as key indicators of sustainability within the states and territories. There are a number of common themes associated with evaluating the sustainability of councils. These are summarised in the table below. The ongoing sustainability of a council can be considered in terms of the following factors. 21
  22. 22. Sources of funding • an appropriate reliance on the use of debt. Asset management and renewal • the long term financial model incorporates the long term asset management financial requirements. Infrastructure capital • there are no apparent difficulties in funding the sustainability required asset renewals • the asset base is being renewed at a rate that is consistent with its consumption. Financial capital • consistent operating surpluses sustainability/viability • sufficient working capital • the commitments in respect of the interest expense on loans represents a small proportion of revenues. These themes are represented in the small number of measures of sustainability that have been identified. 22
  23. 23. Assessing financial sustainability—The national frameworks The national frameworks for sustainability include a number of proposed measures to assess the sustainability of councils. These are provided below. Income generating efforts Rates The following characteristics may indicate a need for closer examination: • where adopted rate increases that have fluctuated substantially • where rates are at a level that are considerably different to the group median of comparable councils, particularly where councils indicate a long term inability to maintain and renew assets, have persistent underlying operating deficits, and significant debt. Other own source revenue The following characteristics may indicate a need for closer examination: • where there is a lack of transparency in the determination of the pricing of services. Operating costs The following characteristics may indicate a need for closer examination: • where significant and continuous annual increases in operating costs per assessment have been incurred • where operating costs are well above the group median. Operating results For these purposes the operating result refers to a surplus or deficit, calculated on an accruals basis, excluding asset revaluations, developer contributions, capital grants and accounting corrections. The following characteristics may indicate a need for closer examination: • where operating deficits have been consistently incurred • where a resource plan has been adopted that does not make adequate provision to rectify the situation. Efficiently delivered services that are appropriate to needs Councils should be delivering services appropriate to the needs of their communities in an efficient manner. They might consider a best value type assessment together with changes in operating costs. The following characteristics may indicate a need for closer examination: • where there is an absence of robust community engagement processes to determine appropriate service standards and levels. 23
  24. 24. Short and long term financial sustainability Liquidity The following characteristics may indicate a need for closer examination: • where difficulty in meeting short term financial obligations is being experienced • where no prospect of improvement is evident. Debt Councils may be considered as being less sustainable if they: • have debt which limits their capacity to fund essential needs and negatively impacts on the capacity to provide operational services • leave future generations of ratepayers facing an unmanageable bill for services provided for current ratepayers • the level of net interest costs associated with debt cannot be met comfortably from a council’s operating revenue. Ability to maintain, renew and upgrade assets Asset Renewal The following characteristics may indicate a need for closer examination: • where spending is considerably less on capital works compared to depreciation expense; or (preferably) • where renewal levels as stipulated in the asset management plan are not being met – in other words there is a renewal gap that is not being addressed. 24
  25. 25. Enhanced national frameworks At the inaugural meeting of the Australian Council of Local Government (ACLG) on 18 November 2008 the Prime Minister, the Hon Kevin Rudd MP, indicated that he wanted to have, at the next annual plenary ACLG meeting, a discussion about local government infrastructure needs that is informed by an agreed set of information based on council asset management and financial management plans. Mr Rudd also indicated that the Australian Government would consider: • making resources available for a long term reform fund to support councils improve asset management and financial planning • making its future infrastructure investment linked to the implementation of nationally consistent asset management systems. A discussion at the level proposed by the Prime Minister is not possible until nationally consistent local government asset management and financial management plans are implemented. The enhancement of the national frameworks and acceleration of their implementation will: • ensure a consistent approach to asset management and financial reporting is implemented for all local governments from 31 December 2009 • enable a consistent picture of the financial position of local government, including its asset management task, across Australia to be obtained • provide the basis for a discussion about best practice in local government financial and asset management planning and reporting at the 2009 ACLG plenary meeting. The Enhanced National Frameworks (2) are included below. Enhanced national framework on asset planning and management Introduction Task To develop a nationally consistent asset management framework, including the elements of an asset management plan, to support improvement in local governments’ asset management performance and sustainability. Scope and purpose of this paper This paper sets out the background, principles and elements of an enhanced national asset management framework and builds on the framework endorsed by LGPMC on 27 March 2007. The paper: • outlines why a national asset management framework is important for the overall financial sustainability of local governments • presents key challenges that councils face in managing their assets • identifies the key principles that underpin a national asset management framework • identifies the proposed elements of a national asset management framework. 25
  26. 26. Definition of assets This paper is concerned with developing a national asset management framework which focuses on those long term assets managed by local governments which are commonly referred to as infrastructure assets. These assets would generally include such assets as roads, water and sewerage assets, drains, bridges, footpaths and public buildings, which a council provides for its community. Background The Prime Minister, the Hon Kevin Rudd MP has placed local government infrastructure, and therefore local government’s ability to manage its finances and its assets, on the agenda through his speech at the Australian Council of Local Government meeting on 18 November 2008. The Prime Minister indicated that he wanted to have, at the next annual Australian Council of Local Government meeting, a discussion about infrastructure needs that is informed by an agreed set of information based on council asset management and financial management plans. A national asset management framework Management of local government assets Assets deliver important services to local communities. A key issue facing local governments throughout Australia is the management of ageing assets in need of renewal and replacement. Infrastructure assets such as roads, drains, water and sewerage assets, bridges and public buildings present particular challenges as their condition and longevity can be difficult to determine and the increasing demands in terms of quality and standards. The creation of new assets also presents challenges in terms of funding for initial construction and ongoing service costs. The development of a national framework for asset management should support improved asset management by local governments across Australia. It should assist in highlighting key asset management issues where a common approach is needed. A national approach should promote prudent, transparent and accountable management of local government assets. It should introduce a strategic approach to meet current and emerging challenges and ensure a national debate on local government can occur on an informed basis. Guiding principles for a national approach The guiding principles that underpin the development of a national asset management framework should allow each state and territory to consider and determine how the elements of the national framework will be accommodated and implemented. The guiding principles are: • a nationally consistent approach to asset management should sit within the context of each state and territory’s legislative and operating framework. States and territories should be able to implement the elements of the asset management framework in accordance with their own particular circumstances which may include legislative reform, policies, programs or best practice guidance • the elements of a national framework should not limit states and territories in their asset management programs. There may be additional elements that individual jurisdictions may wish to pursue. 26
  27. 27. Elements of a national approach Seven elements of a national framework have been identified. These are: • development of an asset management policy • strategy and planning • governance and management arrangements • defining levels of service • data and systems • skills and processes • evaluation. Each state and territory will adopt these elements to facilitate an improvement in asset management performance by local governments in their jurisdiction. Development of an asset management policy States and territories will develop an asset management policy/statement which sets out the policy framework for local government asset management and provides high level guidance to assist councils to develop their own asset management policy. The policy/statement shall encourage councils to developing their own asset management policy which: • establishes the objectives for asset management providing a platform for service delivery • integrates asset management with council corporate and financial planning • assigns accountability and responsibility for service delivery together with asset management • broadly takes account of whole of life costing, service levels and financing options • requires the adoption of an asset management plan informed by community consultation and local government financial reporting, and which is supported by training in financial and asset management. Strategy and planning Asset management strategy Councils should be provided with guidance from the state on developing an asset management strategy and plans, the assumptions of which should be independently reviewed. Council’s asset management strategy should support and implement its asset management policy. The development of an asset management strategy by councils will enable councils to show how their asset portfolio will meet the service delivery needs of their communities into the future. It will also show how councils’ asset management policies to be achieved and ensure the integration of councils’ asset management with their long term strategic plans. Asset management strategy/strategic plans will address the following: • What assets do we currently have? • What is the current situation with regard to council’s assets and their management? This would include current and forecast future needs, and adequacy of funding. • Where do we want to be? A council’s asset management strategy should fit with the goals and objectives of its council plan. • How will we get there? This would include a comparison between the current situation and the proposed future to highlight where strategies will need to be developed to cater for any changes. 27
  28. 28. Asset management plans Asset management plans will: • include all assets on an asset register • provide information about assets, including particular actions required to provide a defined level of service in the most cost-effective manner • incorporate risk management strategies • include financial information such as capital expenditure for renewing, upgrading and extending assets • include consideration of non asset service delivery solutions (leasing, private/public partnerships) • recognise changes in service potential of assets • be subject to a performance review • outline an improvement program • have clear linkages to other council strategic documents. Governance and management arrangements The enhanced asset management framework will ensure councils apply and effect good governance and management arrangements which link asset management to service delivery. Evidence of good corporate governance in asset management would include councils: • assigning roles and responsibilities for asset management between the Chief Executive Officer, the council and senior managers/asset managers • having a mechanism in place to provide high level oversight of the delivery of council’s asset management strategy and plan • maintaining accountability mechanisms to ensure that council resources are appropriately utilised to address councils’ strategic plans and priorities. Defining levels of service States and territories will develop mechanisms that ensure councils define the levels of service they expect to provide from their asset base. This would include ensuring that councils: • establish service delivery needs and define service levels in consultation with the community • establish quality and cost standards for services to be delivered from assets • regularly review their services in consultation with the community to determine the financial impact of a reduction, maintenance or increase in service. Data and systems The enhanced framework provides for the collection of asset management data to: • enable the state and/or councils to measure asset management performance over time • identify infrastructure funding gaps • enable councils to benchmark within the sector and council groups within their state and across Australia. Councils should also continually work to improve the consistency of the financial data they produce, particularly in relation to capital expenditure and the allocations between maintenance, renewal and upgrade. 28
  29. 29. Skills and processes The enhanced asset management framework contains a continuous improvement program, which includes: • providing councils with a whole of organisation perspective and a best practice framework to enable continuous improvement of their asset management practices. This would include helping councils to set targets for future improvement • developing and providing ongoing training programs for councillors, council management and officers on key asset management topics in partnership with peak bodies and agencies • providing the sector with best practice guides on key asset management topics to improve condition assessment, valuation of assets and accounting treatment. Evaluation An asset management framework should contain a mechanism which measures its effectiveness including the asset management programs and initiatives implemented. Enhanced national framework on financial planning and reporting Introduction Task To develop a nationally consistent approach to financial planning and reporting and to set out the elements of the national framework. Scope and purpose of this paper This paper sets out the background, principles and elements of an enhanced national financial planning and reporting framework. The paper: • outlines why a national financial planning and reporting framework is important for the overall financial sustainability of local governments • presents key challenges that councils face in managing their finances • identifies the key principles that underpin a national financial planning and reporting framework • identifies the proposed elements of a national financial planning and reporting framework. Definition of financial planning and reporting This paper is concerned with developing a national financial planning and reporting framework which focuses on local governments’ financial management. This includes the strategic longer term and annual planning levels, annual reporting level, and especially on the linkages and ease of comparability, for the community, between these levels so that it is easy to determine what council said that it would do compared with what was actually done and explains why variances arose. Background The LGPMC endorsed, on 27 March 2007, nationally consistent approaches to: i. criteria for assessing financial sustainability of local councils ii. asset planning and management iii. financial planning and reporting. 29
  30. 30. The Prime Minister has placed local government infrastructure, and so local government’s ability to manage its finances and its assets, on the agenda through his speech at the Australian Council of Local Government meeting on 18 November 2008. The Prime Minister indicated that he wanted to have, at the next annual Australian Council of Local Government meeting, a discussion about infrastructure needs that is informed by an agreed set of information based on council asset management and financial management plans. An enhanced national framework for financial planning and reporting is proposed to ensure a national debate on local government’s financial position can occur on an informed basis. An enhanced national framework Management of local government finances Councils provide physical assets and infrastructure to contribute to meeting the public's need for access to major economic and social facilities and services. A key issue facing local governments throughout Australia is management of the financing of ageing assets in need of renewal and replacement. Infrastructure assets such as roads, drains, bridges, recreational, leisure and community facilities present particular challenges as their relative sizes can be large which requires planning for large peaks and troughs in expenditure on renewing and replacing such assets. The cash accounting mindset with a view to determining a rate which will finance this year’s needs is not sufficient to allow for such major works. Strategic planning based on asset management plans is necessary to determine if councils will be able to finance the works necessary to continue to provide service levels. The creation of new assets also presents challenges not just in terms of financing initial construction (which is often grant assisted) but in financing the ongoing operating and replacement costs which will be necessary during the full life cycle. The development of a national framework for financial planning and reporting should support improved financial management by local governments across Australia. It should assist in highlighting key financial management issues where a common approach is needed. An enhanced national approach will promote prudent, transparent and accountable financial management by local governments. It should ensure a strategic approach to meet current and emerging challenges. Guiding principles for a national approach The guiding principles that underpin the development of a national financial planning and reporting management framework should allow each state and territory to consider and determine how the elements of the national framework will be accommodated and implemented. The guiding principles are that: • a nationally consistent approach to financial planning and reporting should be a core part of each state and territory’s legislative and operating framework. States and territories will be able to implement other elements of their financial planning and reporting framework in accordance with their own particular circumstances which may include legislative reform, policies, programs or best practice guidance • the elements of a national framework should not limit councils in their financial planning and reporting programs, provided the core elements are satisfied. There may be additional elements that individual jurisdictions may wish to pursue. 30
  31. 31. Councils should also continually work to improve the consistency of the financial data they produce, particularly in relation to capital expenditure and the allocations between maintenance, renewal and upgrade. Elements of a national framework Overview The planning and reporting framework should be given effect to in the following way: • strategic longer term plan • annual budget • annual report. These documents provide a framework that covers the council’s direction setting, monitoring and resource allocation. Strategic longer term plan The strategic longer term plan is to be for a fixed period. As a minimum it covers the term of office of the councillors as well as reflecting the needs of the community for the foreseeable future. The plan brings together the detailed requirements in the council’s longer term plans such as the asset management plan and the longer term financial plan and details what council expects to do in the longer term. It also demonstrates how council intends to resource the plan. Public consultation Consultation with communities should be central to the development of strategic, longer term planning by councils. Contents of a plan The plan should include: • where the council is at that point in time—current position • where it wants to get to—vision and strategic objectives of the council • how it is going to get there—strategies for achieving those objectives • mechanisms for monitoring the achievement of the objectives • how the plan will be resourced. Budget Councils prepare a budget for each financial year. Contents of a budget A budget includes: • estimates of revenue and expenditure with an explanation of the assumptions and methodologies underpinning the estimates • explanation of how revenue will be applied • connection to the strategic objectives • explanation of the financial performance and position of the council. Information contained in the budget should be presented in a way which is usable and understandable by the community and which can be compared with the audited financial statements. 31
  32. 32. Public consultation Consultation with communities should be central to the development of the budget. Councils should leave sufficient time to include the outcomes of their community consultation process in preparing their budget. Annual report Councils prepare an annual report in respect of each financial year, which should be publicly available within a reasonable time after the end of the financial year. Contents of an annual report The contents of an annual report are: • a report on the council’s operations during the financial year • audited financial statements for the financial year • an explanation to the community on variations between the budget and the actual results • the impact on longer term strategic plan of such variances. Report of operations The report of the council’s operations (in the annual report) needs to include a broad range of information, particularly: • reviews on the performance of the council against strategic objectives • information on a range of other matters such as major works undertaken, the range of activities undertaken, major policy initiatives and major changes in the council’s functions or structures • details about the council, including information about the councillors, the chief executive officer, senior officers and the organisational structure. Financial statements The financial statements are compiled on an accruals basis in accordance with Australian Accounting Standards and are independently audited. 32

×