Wednesday, November 29, 2023

Council puts case for a special rate variation

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As stated in last week’s Argus the Narrandera Council has endorsed the undertaking of community consultation on a potential application to the Independent Pricing and Regulatory Tribunal for a proposed permanent Special Variation (SV), with consultations starting tonight [28 September 2023] in Narrandera.

General Manager George Cowan highlighted issues around the council’s financial position at last week’s Council meeting and sought a resolution to proceed to community consultation on a potential application for a proposed permanent Special Variation (SV) of either a one year SV of 41.5 per cent in 2024-25 (including the forecasted rate peg of 3.5 per cent) or a two year SV of 25.5 per cent in 2024-25 (including the forecasted rate peg of 3.5 per cent) and 18.0 per cent in 2025-26 (including the forecasted rate peg of 2.5 per cent), representing a cumulative Special Variation of 48.1 per cent over two years.

“Some of the causes of this position have been building progressively over a long period and some are much more recent.

“The need to upgrade the stormwater system in Narrandera is an important component of the challenge faced by Council, but it is only one of many factors impacting on the long-term sustainability of the organisation,” he said. “The combined effects of ongoing rate pegging at levels below actual cost, fair value accounting for assets, increasing compliance cost and growing community expectations fuelled by the Integrated Planning & Reporting (IP&R) process have taken their toll.”

He said Council had been through the Fit for the Future process and identified the factors affecting operations, fine-tuned the accounting around management of the assets and he strongly believed that the future sustainability of the Council now rested on a significant increase in income.

Explaining the background to it he said the NSW Government commenced a process of review of local government in 2012 to ensure councils in this state were sustainable. Under the banner of “Fit for the Future”, all councils underwent assessment against pre-determined criteria to establish their financial sustainability, infrastructure and service management, efficiency, scale and capacity and relative effectiveness.

Performance benchmarks were established, and Narrandera Shire Council developed and implemented a “Fit for the Future Improvement Action Plan” covering many functions and initiatives.

The Council went through that process and was also measured for possible amalgamation with neighbouring councils. Those amalgamations did not proceed, as studies undertaken at the time showed that there would be little or no advantage to ratepayers in any amalgamation.

Mr Cowan said in 2015 Council conducted an organisational review, accompanied by service level reviews covering most of the operational areas of the organisation. The outcome of this was a streamlined organisation led by a General Manager and two Deputy General Managers, changes to service delivery and staffing levels in several areas.

In April 2017 Council adopted a new Workforce Strategic Plan which included policies on apprenticeships, traineeships, flexible work and reward systems. There were direct operational savings to Council because of the restructure.

“However, the Long-Term Financial Plan (LTFP) General fund adopted by Council in June 2017 anticipated a net operating result of just $9K after allowing for $7.8M in wages and salaries costs and $4M in depreciation. Importantly, the plan predicted the exhaustion of all internally restricted cash in the fund during the life of the plan,” he said.

Mr Cowan was appointed General Manager shortly after that and one of the challenges he was given was to ensure Council’s long term financial health.

Council’s performance as an organisation since that time appeared to be very good, with community asset investments occurring across the Shire together with a healthy looking balance sheet.

“This appearance masks the reality and, in fact, has been enabled by an extraordinary flow of grant funds from both State and Federal Governments that we have been warned is unlikely to continue.

“The long term ‘squeeze’ that is ratepegging manifests itself in two important areas. Firstly, as costs increase quicker than revenue, cash reserves dwindle and secondly discretionary spending and investment declines. If this was to occur over one year or perhaps several the impacts could be manageable but when it continues for decades, the results are inevitable.”

Mr Cowan said the reality was that the General Fund is now under unsustainable pressure and a substantial change in the income/expenditure balance is required.

Importantly, Council’s ‘Own Source Revenue’ (one of the Fit for the Future ratios) continued to wallow well below the 60 per cent benchmark (forecast 2023-24 51.50 per cent) and the asset backlog was growing.

If nothing was done to address this issue, Council would face:

  • An average operating deficit for 10-year forecast period estimated at $2.0M pa
  • Insufficient money to maintain current service levels and asset renewals
  • Inadequate funding for infrastructure renewal
  • Underfunding for expected growth and expanded services.

Ongoing estimated operating deficits culminating in 2033-34 with a $3.0M annual operating deficit. Over the same period, General Fund cash estimated to decrease by $8M with an average negative unrestricted cash position of $3.6M from 2025.

Mr Cowan warned that a negative unrestricted cash position was highly illegal and cannot be allowed to occur. It had resulted in other councils being plunged into administration.

In 2017 the NSW Auditor General was appointed as the auditor for local governments in NSW. One of the emphases of the approach had been to require councils to account more accurately for assets under their control. Narrandera Council manages assets to the value of $306.2M and has an annual depreciation cost of $4.878M ($241.755M and $4.346M on its General Fund assets.)

For accounting purposes, the assets are grouped into five classes or types. Each type has its own management plan and is further split based on a condition rating (1-5) where condition 1 is the best and 5 is very poor.

Narrandera’s revised Draft Asset Management Plan estimated that in 2021-22 there was an asset backlog of $16M, being the estimated cost to bring assets to a satisfactory standard. This included assets such as, parts of the Council chambers, some aerodrome buildings, parts of Grong Grong Hall, Barellan pool, some sealed road surfaces, water treatment plant, bores and mains.

The benchmark for local government set by the Office of Local Government is two per cent or in Narrandera’s case $6.12M.

Mr Cowan said the acquisition, renewal and/or replacement of assets was a critical part of Council’s operation and a factor in determining service levels. These acquisitions were typically funded from several sources, including government grants, reserves, revenue, borrowings with repayments met by ratepayers, or a combination of those sources.

In the revised LTFP and the Asset Strategy, Council assumed that it would continue to receive some capital grants for renewals but had also assumed that grants were less likely to be received for operational assets.

He said a complete review of the asset databases was undertaken over recent months. New asset management plans were written and there was a level of confidence about the accuracy of the data now on hand.

Morrison Low recently assessed the asset data as reliable in all classes except stormwater, where estimates have been used as many assets are underground and cannot easily be inspected. Included in that review was an assessment of the condition ratings and the “fit for purpose” standard of all the assets.

Mr Cowan said the annual depreciation expense for General Fund assets was estimated at $4.346M and far exceeded Council’s current capacity to fund from rate revenue.

“Council’s current financial position does not allow it to fund these renewals from revenue, and grant opportunities are being pursued to meet those costs. A good example of that situation is reflected in the Narrandera tennis complex. This valuable community asset is in poor condition and in need of renewal; Council has had to wait until it received grants to undertake the works. In this instance that approach has worked, but what if the grants were unavailable?,” he said.

He was adamant that there was no intention to recover the full cost of the asset renewals from ratepayers, but Council must be able to meet its share of that cost and to match grants when received.

Mr Cowan said re-iterated that funds held in externally restricted cash could only be used for the purpose shown and cross subsidisation was not allowed.

“There are limited funds in the internal restrictions and very little spare in unrestricted cash. Importantly, there are also other pressures now exerting irresistible force on the General Fund.


ARIC – Whilst councils come under the management of the State Government generally, the Office of Local Government, the Minister and the Auditor General exercise day-to-day control and establish and enforce governance regulations. One such of these is a requirement that councils establish and operate Audit Risk and Improvement Committees (ARIC) and develop associated risk management strategies under guidelines issued by the Minister. Narrandera Shire has had an ARIC for several years and its operations and associated support structures are being updated to bring it in line with the regulation which takes full effect in July 2024. The cost of these changes will be between $150-200K annually and is the result of having to split the administration of the ARIC committee and the risk management function and upgrade the operations of the ARIC itself. There is no doubt that the Council will enjoy benefits flowing from the work of the ARIC and the risk management function, but those benefits will likely be in the form of improved processes and productivity rather than in improvements to the financial position.

Rural Fire Service – Narrandera Shire is part of the Murrumbidgee District Zone for the purposes of the Rural Fire Service and, despite exercising little or no practical control over the service or its assets, is legally liable and required to account for them. This manifests itself in two ways. Firstly, there is a cash component that Council must pay to the State as its contribution to both capital and operational expenses. Secondly, the assets appear in Council’s accounts along with the cost of the depreciation. In Narrandera’s case those numbers are substantial. The contribution has risen from $211,000 in 2017 to $368,198 in 2023 – an increase of 74.5 per cent. The depreciation expenses for RFS “Red Fleet” assets in 2022 was $164,000.

Staffing: Council has a workforce strategy that provides details of the level of staffing and the policies and practices around the employment of the resources needed. Whilst staff numbers have remained relatively constant overall, the cost of employment continues to rise ($7.8M in 2017 to $9.7M in 2023).

In regard to stormwater Mr Cowan said Councillors and residents would recall the disastrous events of early 2022 when the stormwater systems in Narrandera failed to cope with heavy rain events resulting in inundation of several homes and business premises.

“One of the most serious impacts occurred at Teloca where residents were evacuated, some never to return. The community response to these flood events was loud and conclusive – residents found it was unacceptable that the problem had not been previously addressed and demanded that Council develops a solution to prevent this type of flooding from reoccurring.

“Following those events, an assessment of the system commenced which resulted in some immediate upgrade works to improve the inlets and the design of a new parallel system to be installed from around May Street through to the canal. This new system has been designed by hydrology experts and is estimated to cost $16.5M.

“Staff have commenced discussions with the NSW State authorities seeking financial support and it has been included in the Narrandera Flood Mitigation as number one priority. Council’s contribution could be as much as 50 per cent of the cost of the work, or around $8.25m.

“Depending on the amount eventually borrowed for a new drainage system, repayments will vary up to $594K pa (loan of $8.25M).”

Commenting on alternate sources of revenue Mr Cowan said during the past three years, Council had been able to realise significant additional revenue from asset sales, temporary transfer of water, industrial land sales and, in recent months, interest on investments to help meet asset renewals in several areas and to support management of operational costs.

Shares in Southern Phones and the small office building in Twynam Street were sold which, along with the proceeds of temporary transfer of water holdings, had been used to establish a reserve that funded installation of LED streetlights, Council’s share of the new taxiway at the airport and the cost of new solar installations at six operational sites.

These cash injections were largely one-offs and would not be repeatable.

Despite undertaking a complete review of fees and charges, opportunities to increase revenue from this source were very limited, Mr Cowan said.

“In fact, the community expectation in this area is for Council to minimise and/or waive fees for the use of community facilities and/or for services rendered. In the recent past the community has been consulted on fees for entry to the Lake Talbot Water Park and for the possible introduction of a green waste service and, in both cases, the resounding response from the community was opposition to any fee increase.”

He said Lake Talbot Water Park had the lowest entrance fees for any major facility in the region.

Where fees were charged, full cost recovery was not an option and facilities such as the water park, indoor stadium and sporting fields operated at significant and increasing losses.

Each of those facilities has had some upgrading over the past three years through the critical support of the NSW and Federal governments, but the operating costs continued to grow. In relation to grants Mr Cowan said in the last few years this council, and local government generally, had benefitted from a significant flow of grant funds. These funds had assisted in repairing and upgrading many community facilities, roads and bridges.

The NSW Stronger Country Communities Fund provided $4.778M for many very valuable upgrades to community facilities and the Federal Local Roads and Community Infrastructure fund $4.312M. Council also received $8M under the Playground on the Murrumbidgee Project.

Both State and Federal governments had made significant funds available for road grants but indications from both governments suggest that Council cannot rely on this level of grant funding to continue and that future community and operational infrastructure must be at least partially locally funded.

Future opportunities

Mr Cowan said in addition to the traditional role of providing services and community facilities, residents and higher levels of government expected Councils to do more, to take advantage of opportunities, and to support and grow the economic and population base of the Shire.

“To do that the council needs capacity and resources. Some of the opportunities that are immediately available include: • Australian Airline Pilots Academy proposal for a facility in Narrandera. Council has been improving the airport at Narrandera, provided an office for the satellite operations, and is currently working on building a parallel taxiway. For the academy to progress, Council will have to be able to support the provision of services to the site. • With the sale of the last of the Council-owned land available in the Red Hill industrial estate, Council is working to build a new estate on land to the west. This will require a substantial investment. Grant applications have been lodged based on designs and estimates prepared and it is likely that Council will have to find 20 per cent of the construction costs of around $5M.

Mr Cowan said while this was a “build-sell-recover investment” scenario, having the available funds and approved development applications was a core requirement of the grant application.

“Attracting new industry to Narrandera is a stated objective of the Council and is strongly supported by the community who expect the population to grow.

He said Lake Talbot was a very important local recreation facility, but it was under threat and required deepening. Studies to get the project to a “shovel ready” stage were underway, but it was very likely that the actual work of deepening would require substantial investment by Council.

Preliminary estimates put the cost of that work at $2M and Council’s share could be at least 20 possibly 50 per cent.

“Council has received several approaches from members of the public to provide independent living style housing. Whilst Council owns suitable land, finding the resources to respond to these challenges is problematic and largely beyond current income levels,” Mr Cowan said.

Construction of a flood levee to protect Barellan from flooding of Mirrool Creek had reached an advanced stage and final design and cost estimates were being prepared. Initial estimates put the cost at $5.5m and if accepted as part of the NSW Government flood mitigation grants scheme, Council would be asked to contribute one seventh of that cost.

“Government grants and private investment are critical to these projects going ahead, but so also is the Council financial support. In most cases an investment of between 20 per cent and 50 per cent is required for a successful grant application and these are multimillion-dollar projects.” 

Narrandera Argus 28 September 2023

This article appeared in the Narrandera Argus, 28 September 2023.

Related stories: Basis for rate variation explained; Council flags big rates hike.


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