Financial Management of Local Councils

Financial sustainability

The term 'financial sustainability' is not defined in the Act or Local Government (Planning and Reporting) Regulations 2020. Councils are required to comply with underlying financial management principles set out in the Act when establishing their financial policies and when setting their budgets.

These principles include the need to:

• manage revenues, expenses, assets and liabilities in accordance with financial policies and plans
• provide stability and predictability in the financial impact on the municipal community
• monitor and manage financial risks, including risks to financial viability and those related to financial liabilities.

In essence these principles can be distilled into the objective that past and current revenue and expenditure policy settings (both recurrent and capital) should enable a council to: 

• continue to deliver its services at its desired service levels and standards
• meet its current and future expenditure obligations
• respond to materialising risks and absorb the impacts of foreseeable changes and economic fluctuations without the need to significantly adjust its financial policies.

Annual financial report and performance reporting

Under the Act and Local Government (Planning and Reporting) Regulations 2020, councils must include an audit financial report in their annual report. The financial report includes:

• an operating statement showing annual revenue, income and expenses from all sources – the difference being the operating result, which may be a surplus, break-even or a deficit. The operating result is a primary financial performance measure and, when analysed over time, provides a direct insight into the sustainability of councils' income and expenditure policies. While not reported on the face of the financial statements the operating result may be further decomposed into an 'underlying result', which seeks to indicate the extent to which non capital operational revenues match or exceed operational expenses
• a balance sheet showing council assets and liabilities at the end of each year – the net movement between balance dates shows whether councils maintained or eroded their capital base. A key balance in terms of financial sustainability is the amount of interest-bearing debt (borrowings) a council carries, because ultimately debt needs to be paid back either through future operating surpluses or by the sale of assets
• a cash flow statement showing opening and closing cash balances. The net movement in these balances are sub-categorised into the source and nature of the cash inflows and outflows – operating, investing and financing. Two key net cash flow results are:
  • net operating cash flows: these need to be positive over time (that is, net inflows) for councils to invest in assets or service their debt. Negative net operating cash flows mean councils need to use their cash reserves or borrow to fund their asset programs
  • net free cash flows: these are calculated as the net cash flows left after operating and investing activities. They show whether councils pay for new assets using only cash generated from their operations. They correspond to the state's 'fiscal cash balance'. Positive free cash flows allow councils to either accumulate surplus cash or to pay off their debts. Negative free cash flows mean that councils did not generate enough cash to finance their annual investment program and used some of their cash reserves to fund their capital works programs.

We consider a council to be operating sustainably if it has been able to maintain operating surpluses over the long-term, on average, or at least has broken even.

Persistent operating deficits over extended timeframes, on the other hand, mean a council's income and expenditure policies are not sustainable. Such structural deficits need revenue and/or expenditure policies to change.

Over shorter, intermediate timeframes, persistent underlying operating deficits can indicate that there is a longer-term risk emerging that councils will become unsustainable.

Financial sustainability indicators

Examining councils' financial sustainability is complex. We use a range of indicators to gain a comprehensive understanding of their financial position and assess their sustainability.

The key financial sustainability indicators we use are:

• operating ratios: the net operating result as a percentage of revenue and the net operating cash flow as a percentage of operating cash inflows. A positive net result ratio reflects an operating surplus and a negative ratio reflects a deficit. Sustained deficits mean a council has an issue with its long-term financial sustainability
• asset management ratios: asset renewal and upgrade costs as a percentage of depreciation expenses
• financing ratios: working capital, which is current assets as a percentage of current liabilities and the loans and borrowings ratio, which is debt (borrowings) as a percentage of rates revenue.

We also use the following supporting indicators because they provide useful supporting information about councils' sustainability: 

• underlying operating ratio: determined by comparing the adjusted operating results to adjusted operating revenue (that is, excluding one-off capital grants and non-monetary asset contributions)
• unrestricted cash ratio: the unrestricted cash balance as a percentage of current liabilities
• interest coverage ratio: the interest costs as a percentage of total revenue.

Net result ratio

At a sector level, councils' median net result ratios have been positive, but they are trending down. The growth in their total expenses is starting to, or is, outpacing their total income.

The sector net result ratio median is positive every year from 2015–16 to 2023–24. Although there is a downtrend from 2016–17 to 2022–23 from 16 to 12 per cent.

The council cohort net result ratio medians are also positive from 2015–16, except large and small shire councils in 2023–24. There is a downtrend from 2016–17 to 2022–23 for metropolitan and interface councils.

VLGGC did not make financial assistance grant payments to councils in 2023–24, which negatively impacted ratios in this year.

Figure 2: Median net result ratios by cohort from 2015–16 to 2023–24

Source: VAGO.

For our audited councils, all except Northern Grampians had net surpluses for most years from 2015–16 to 2023–24:

• Northern Grampians reported net deficits for 6 of 9 years. Its results are below the small shire council median with a similar downtrend. It identifies in its annual reports that structural issues underpin its ongoing net deficits.
• Yarra has a higher proportion of income from fines and user fees compared to the other audited councils. This means it was affected more by COVID-19 and had lower net results from 2019–20 to 2021–22. Its results have returned to pre-COVID-19 levels while the metropolitan council median results are trending down.
• Wyndham’s net surpluses are above the sector median. In 2023–24, 47 per cent of its income came from cash contributions and non-monetary asset contributions including those from developers. Its results have been flat while the interface council median trends down. But it is forecasting a decline in its net results.

All the audited councils, except Maribyrnong, forecast in their 2024–25 budgets a continuing decline in their net result ratios from 2024–25 to 2027–28. 

Figure 3: Audited councils' net result ratios from 2015–16 to 2023–24 and forecast results to 2027–28

Source: VAGO.

We discuss the audited councils' financial management practices in Section 5.

Net operating cash flow

Most councils generate more cash each year than they outlay on their operations. Councils' positive net operating cash flows mean councils can fund their operations and services and use the cash surplus to fund capital projects. But the extent of the surplus is declining. 

A negative net operating cash flow would mean that councils are spending more cash than they are generating, which is not sustainable in the short term.

All council cohorts, except for interface councils, have net operating cash flows that are lower in 2023–24 than they were in 2015–16. The audited councils are performing in line with their respective cohorts.

Figure 4: Average net operating cash flow by cohort from 2016–17 to 2023–24

Source: VAGO, based on councils’ annual reports.

The net operating cash flows as a percentage of audited councils’ operating cash inflows have declined since 2016–17, except for Yarra. The ratio measures how much cash is remaining from council operating activities compared to the total cash generated from the same operations. The larger the percentage, the stronger the result. Declining results mean that councils are generating less cash to pay for operations and fund capital works. 

To continue providing services, renewing assets and undertaking capital works in the face of declining net operating cash flows, councils may need to:

• use accumulated cash reserves
• borrow funds
• reassess the types and levels of services they provide 
• seek additional support from state and Australian governments.

Figure 5: Audited councils’ net operating cash flow as a percentage of operating cash inflows from 2015–16 to 2023–24

Source: VAGO.

As we discuss further in Section 5, in 2023–24 councils did not receive financial assistance grants in advance and used their cash reserves to supplement their capital works programs.

Working capital ratio

Councils need readily accessible liquid assets, like cash, to pay their bills and deliver services to the community. Councils have the financial resources to pay all their short-term obligations as they fall due. But the sector's working capital ratios have declined since 2018–19. 

The working capital ratio is a measure of an entity's ability to meet its short-term obligations. It compares the ratio of current assets to current liabilities. A measure below one indicates that an entity may fail to pay its debts. 

In 2016–17, councils' current assets exceeded current liabilities by 2.70 times, compared to 2.08 times in 2023–24. Median working capital ratios across the cohorts are strong. 

All cohorts, other than metropolitan councils, had a current asset to current liabilities ratio of greater than 2 in 2023–24.

Figure 6: Median working capital ratio by cohort from 2015–16 to 2023–24 

Source: VAGO.

Our audited councils had positive working capital ratios in the period reviewed. Greater Shepparton and Northern Grampians' working capital ratios were below their respective cohort medians in 2023–24.

Council debt

In contrast to the operating and cash ratios, councils' loans and borrowings ratios are improving. Councils are borrowing less money to fund the upgrade and build of new infrastructure for their communities. 

Low debt levels can be a sign of financial strength and good financial management. But it can also be a missed opportunity if councils do not use their ability to borrow funds to deliver important infrastructure projects that have multi-generational benefits.

The loans and borrowings indicator considers a council’s use of debt, when compared to the rates revenue it generates. It is calculated by dividing the interest-bearing loans and borrowings by the rate revenue and expressed as a percentage. A lower ratio means either debt is growing slower than revenue, or debt has been reduced.

Figure 7: Median loans and borrowings ratios by cohort from 2015–16 to 2023–24

Source: VAGO.

The councils we examined have low and declining debt levels. This is in line with the sector median. Only Maribyrnong increased its loans and borrowings percentage in 2022–23 and 2023–24, but it remains below the sector median. Maribyrnong did not have loans and borrowings from 2016–17 to 2021–22.

Figure 8: Audited councils' loans and borrowings ratios from 2015–16 to 2023–24

Source: VAGO.

Interest coverage

Comparing interest expense to operating revenue provides information on the share of revenue devoted to servicing debt costs.

The sector's expenditure on interest payments represents a small fraction of total revenue. 

In the 8 years between 2016–17 to 2023–24, the sector's interest payments were 0.41 per cent of total revenue, on average. 

Similarly, all the cohorts spent less than 1 per cent of total income on interest costs in the 8 years from 2016–17 to 2023–24.

Consistent with the sector average, the audited councils spent less than 1.25 per cent of their annual revenue on interest payments over the last 8 years.

Councils need strong policies and guidance to ensure any debt funding does not impair the council’s financial wellbeing. For example, councils should consider borrowing to invest in capital projects, if they can service the debt from their own-source income.

We discuss the audited councils' borrowing practices in Section 5.

Council indebtedness 

A different way to review whether councils can service their debts and meet their repayment obligations is the indebtedness indicator.

The indebtedness ratio compares non-current liabilities to own-source revenue. It includes long term liabilities such as long service leave provisions and other provisions. 

Councils' indebtedness is generally improving. From 2015–16 to 2023–24, the sector median changed from 22 to 18 per cent. Small shire councils improved from 14 to 8 per cent. 

The 2023–24 ratios are lower than 2015–16 except for metropolitan councils, which in 2022–23 increased their long-term liabilities by 7 per cent.

Figure 9: Median indebtedness ratio by cohort from 2015–16 to 2023–24

Source: VAGO.

Mostly, the councils we examined reported declining indebtedness ratios. But Maribyrnong’s ratio increased from 1 per cent in 2020–21 to 8 per cent in 2023–24 and Greater Shepparton from 26 per cent in 2015–16 to 28 per cent in 2023–24.

Greater Shepparton and Wyndham reported an increase in the valuation of their landfill rehabilitation in 2019–20 and a decrease in later years. Greater Shepparton's changes also included the staff entitlements valuation.

Yarra and Wyndham reported moving borrowings from non-current liabilities to current liabilities in 2020–21 and 2021–22 respectively. This lowered their indebtedness ratio in those years.

Figure 10: Audited councils' indebtedness ratios from 2015–16 to 2023–24

Source: VAGO.

Adjusted underlying result ratio

The adjusted underlying ratio shows whether a council is generating enough income from its own sources and from recurring operating grants, to meet its operating expenses including depreciation. The sector's median adjusted underlying result ratio is declining.

Declining adjusted underlying results mean councils have reduced capacity to meet their ongoing operating costs. A sustained negative trend in this indicator may suggest a council is not managing its expenditure growth, is not growing its own-source revenue, or is not managing the financial viability of its services, which creates longer-term risks to financial sustainability.

The sector median for adjusted underlying ratio was positive, except in 2015–16 and 2023–24, when VLGGC reduced financial assistance grant payments.

Only the metropolitan council cohort median is positive each year, although the 2023–24 result declined to zero per cent. The other council cohorts had negative results in 2015–16, 2020–22 and 2023–24.

There is a downward trend from 2016–17 to 2022–23 for the sector and council cohort medians.

Figure 11: Median adjusted underlying ratio by cohort from 2015–16 to 2023–24

Source: VAGO.

All audited councils reported some adjusted underlying deficits between 2015–16 and 2023–24. Northern Grampians and Wyndham had the most deficits:

• Northern Grampians reported adjusted underlying deficits in 8 of 9 years. Its results are below the small shire council median, with a similar downtrend.
• Wyndham reported adjusted underlying deficits in 7 of 9 years. In 2023–24, 47 per cent of its income came from cash contributions and non-monetary asset contributions, including those from developers. When this income is excluded, its adjusted underlying results show an increasing deficit. It is below the interface council median, with a similar downtrend.

But while the indicator calculation excludes income from non-monetary asset contributions, it includes the depreciation from the same assets. Councils that receive contributed assets might have a worse adjusted underlying result ratio because of the lag between the growth in rates and other own source revenue and the depreciation on new assets received.

Figure 12: Audited councils' adjusted underlying ratios from 2015–16 to 2023–24

Source: VAGO.

Refer to Appendix D for a summary of other factors that affected the audited councils' results.

Unrestricted cash ratio

Unrestricted cash is the money a council has for short-term use that does not have restrictions in how the council uses it. Restrictions include things such as unspent conditional grants, cash held to fund capital works not completed in a financial year, statutory reserves and some term deposits. Councils' median unrestricted cash ratio has been positive but declining since 2018–19.

But there are limits to how useful this financial performance ratio is for determining a council's unrestricted cash levels. Some cash balances councils report as restricted are accessible by councils. In line with LGV’s guidance, councils classify term deposits with a maturity of more than 90 days as restricted cash. But accounting standards classify these as unrestricted cash. We did not recalculate the unrestricted cash ratio to show the difference in results because we did not have the data.

As Figure 13 shows, the sector median is positive each year from 2015–16 except in 2023–24. While positive ratios grew from 2015–16 to 2018–19, there is a downtrend from 2018–19 to 2023–24 from 120 per cent to negative 3 per cent.

Interface councils reported a 67 per cent reduction in 2019–20 and regional city councils a 24 per cent reduction in 2020–21 before the ratios improved in the following year. The ratio has improved for interface councils in 2023–24.

Figure 13: Median unrestricted cash ratio by cohort, using the Local Government Performance Reporting Framework's methodology, from 2015–16 to 2023–24

Source: VAGO. 

There are similarities in the unrestricted cash ratios between the councils we examined and their respective cohorts. Audited councils reported a decline in their unrestricted cash from 2017–18, 2 years before the COVID-19 pandemic. While Maribyrnong and Northern Grampians results stayed positive, the others' results trended to negative.

This is because councils increased payments into term deposits with more than 90-day maturity. Greater Shepparton did this in 2018–19, 2021–22 and 2023–24, Wyndham from 2020–21 to 2022–23 and Yarra in 2021–22 and 2022–23. But councils can access their term deposits earlier than the set maturity dates at a cost, if they want to. 

We discuss councils' financial management practices in Section 5.

Figure 14: Audited councils’ unrestricted cash ratio, using the Local Government Performance Reporting Framework’s methodology, from 2015–16 to 2023–24

Source: VAGO.

Refer to Appendix D for a summary of other factors that affected the audited councils' results.

Cash and investment balances

At a sector level, councils' cash and investment balances are growing. This means most councils have been building up cash reserves, which they can use to pay bills and fund capital investments. We discuss how councils fund their capital works programs in Section 5.

Cash balances are the total cash a council has at the bank and in short and medium-term investments.

The sector and cohort median cash balances increased from 2015–16 to 2022–23 and decreased in 2023–24, as Figure 15 shows. The reduction in financial assistance grants paid in advance to councils in 2023–24 meant councils used their cash reserves to supplement their capital works programs in that year.

Figure 15: Median cash balances by cohort from 2015–16 to 2023–24

Source: VAGO.

Cash balances for audited councils also increased from 2015–16 to 2022–23. Wyndham's increase in its cash balance is consistent with other interface councils which generate significant income from rates and developer contributions.

Consistent with their cohorts, cash balances declined in 2023–24 for Greater Shepparton, Maribyrnong and Northern Grampians. But unlike the interface council cohort median, Wyndham's cash balance continued to grow in 2023–24. 

We discuss the councils' financial management practices in Section 5.

Council service delivery

Councils provide a range of services including statutory planning, childcare, waste management, libraries and sporting facilities. 

They also build, own and manage community assets such as roads, parks, drainage, recreational facilities and other infrastructure.

Delivering services efficiently requires councils to plan effectively. Councils need to:

• understand the current and future needs of their communities
• identify the resources needed to achieve desired levels and quality of service
• compare these to the resources available 
• make informed, rational decisions about how to best allocate their resources. 

Service planning and monitoring

The councils we examined all have policies and procedures for service planning. But these policies and procedures are at different maturity levels across the councils.

The audited councils do not use clear internal service metrics and indicators to monitor their service delivery. This means that the councils may not be able to tell whether they are maintaining service levels over time.

Councils use the mandatory Local Government Performance Reporting Framework to monitor and report on a range of services they provide. Wyndham and Yarra started annual processes in 2023 and 2024 respectively to review their services and redesign ones that have a significant deviation from their budget. 

Figure 16: Audited councils' service planning processes

 Source: VAGO.

Prioritising services

Councils need a clear understanding of the services they must provide and should prioritise, and the services they can provide but can adjust, if necessary. Two of the 5 councils we examined did not have clear policies and procedures to guide how they prioritise services and resource allocation. 

We found that there are differences in the way audited councils prioritise their services.

Our 2017 audit, Delivering Local Government Services, found that none of the councils we examined had a comprehensive approach to planning and reviewing services.

In our 2017 audit we recommended councils implement planning frameworks that include defining the types and levels of service provided and set clear metrics to assess their performance.

Asset information

Audited councils have extensive asset information for most of their assets and use this for asset management planning. All the audited councils based their asset planning on condition-based, predictive renewal modelling.

Asset planning practices

There are variances in the maturity of asset planning practices of the audited councils. While the audited councils understand the condition of most of their assets, most have not defined service levels in their policies to trigger and guide renewal intervention.

• Yarra only started condition-based renewal modelling of its roads in 2022–23 and is now rolling out the change in approach to other asset categories. Northern Grampians uses condition-based renewal modelling for its roads only, not the other asset categories.
• All audited councils have limited condition information on their drainage assets. Wyndham had condition information on only 9 per cent of its drainage assets, despite these assets making made up 29 per cent, or $1.831 billion, of its $6.236 billion worth of assets on 30 June 2023. Audited councils told us that inspecting these underground assets is a costly activity and they take a risk-based approach when allocating resources to condition assessments of drainage infrastructure.

Only Wyndham and Maribyrnong’s asset plans define levels of service for its assets and set intervention levels by asset category. The defined levels of service guide condition-based renewal modelling and planning as it shows when councils should intervene to renew or replace assets. 

Asset lifecycle costs

None of the audited councils considered or documented the full asset lifecycle cost, or the total cost of ownership in assessing the new capital projects. As a result, the long-term asset plans and financial plans do not reflect the full cost of the new assets.

Assessing the total cost of ownership helps councils to make decisions based on a full understanding of the costs to operate and maintain the new infrastructure into the future.

The councils we examined can improve their capital project planning processes.

Our audit assessed 2 capital works projects from each of the audited councils that they had approved in the 2023–24 budget cycle.

Wyndham and Yarra’s project assessment templates require project teams to document and factor in regular operating and ongoing operational maintenance costs as part of total project costs. But these councils did not follow their own guidelines.

Planning capital projects 

For the capital projects we assessed, 3 of the 5 audited councils were not consistently developing and using business cases in their capital planning processes.

Asset renewals

Councils need to maintain and renew their assets to ensure they can continue to provide services and essential infrastructure to their communities.

Guidance provided by LGV suggests that councils should be renewing or upgrading their assets at the same rate that they depreciate so that they can maintain services. Continually spending less on renewals than the rate of depreciation means that councils may need to spend more in future to maintain those assets. 

The asset renewal gap indicator is an important financial sustainability measure as it shows whether councils are maintaining their assets at a level that allows them to service their communities. 

It measures how much a council is spending on renewing its assets as a ratio of its depreciation charge. Results higher than 100 per cent indicate that councils are maintaining and upgrading assets faster than the rate they are depreciating. 

A sustained result below 100 per cent for a council would indicate an underinvestment in existing assets and an ongoing failure to maintain or enhance these to meet service demand.

Councils' asset renewal rates

From 2015–16 to 2023–24, the sector and the metropolitan and large shires spent more, on average, on asset renewals than depreciation, as Figure 18 shows. Small shires, on average, spent more on renewals than depreciation in 8 of the 9 years, interface councils in only 2 of the 9 years and regional cities in one of 9 years. 

For the same period, audited councils did not consistently renew their assets at the same rate the assets were depreciating, as Figure 19 shows. Only Maribyrnong and Yarra, on average, renewed their assets at a rate faster than their assets were depreciating. Maribyrnong's 2023–24 renewal spending was significantly higher due to building renewal works it undertook. 

Figure 18: Renewal gap by cohort from 2015–16 to 2023–24

Source: VAGO, based on analysis of council annual reports.

Two of the 5 audited councils, Northern Grampians and Wyndham, did not meet the renewal expectation in any of the past 9 years. Greater Shepparton’s average renewal spend over this period is just below its depreciation expense at 95 per cent.

Figure 19: Audited councils’ asset renewal indicator results from 2015–16 to 2023–24 

Source: VAGO, based on analysis of council annual reports.

According to their asset plans, all audited councils except for Northern Grampians plan to renew assets at rates higher than their modelling suggests they need to maintain them. 

Northern Grampians' asset plan acknowledges the rate it is planning to renew assets is not sustainable and will result in a reduced level of service. But it lacks the financial resources to keep up with its renewal obligations.

Wyndham, as a growth council, has newer assets compared to more established councils. Its spending on renewals is less than its asset depreciation expense but enough to renew its assets and consistent with its renewal modelling. 

Councils need to better understand their renewal gap and relate this to how much they are spending annually. They should invest enough resources into renewing their assets to meet the ongoing needs of their communities and ensure assets can be used without posing a risk to the safety of users.

Delivering capital programs

Across the sector, most councils do not fully implement their plans to renew and replace their assets. 

If councils do not deliver capital programs in full, their older existing assets may need more maintenance and increase renewal costs. This potentially presents a risk to the users of the assets.

It can also mean ongoing disruptions to delivering capital programs as councils carry forward delayed or incomplete projects, which impacts their ability to start new projects. Councils may not be using their resources optimally.

The sector did not meet its total capital works budget in any year from 2017–18 to 2023–24. No cohort delivered capital projects as budgeted for, except regional cities which exceeded budget by 6 per cent in 2017–18. 

From 2017–18 to 2023–24 none of the audited councils, except for Northern Grampians, delivered their capital programs as planned.

Figure 20: Percentage by which audited councils met or missed their budgeted capital works delivery from 2017–18 to 2023–24  

Source: VAGO, based on analysis of council annual reports, budget and forecasts.

Northern Grampians met or exceeded their capital works budget from 2020–21 to 2023–24. Its capital works are largely funded by grants, which can be project specific or not tied to specific use.

Northern Grampians, as a small shire, has a capital works budget that is smaller than councils in the other cohorts. In 2023–24, Northern Grampians’ capital works budget was $12 million. Wyndham’s capital works budget for the same year was $167 million.

Audited councils told us that capital works delivery has been affected by:

• inadequate service planning
• supply chain delays
• ambitious capital works budgets
• carry-forward projects that may need to be finalised before new projects start
• reduced responses to tenders by contractors and contract delays
• internal resource scarcity.

It is important that councils set their capital budgets at levels they can achieve and that they ensure they continue to meet the community’s needs for community infrastructure.

Financing capital works programs

Across the sector, councils are financing their capital works programs using funds they generate from their operations. Most councils are spending less on their capital expenditure than the cash they have left over after meeting operational costs (their net operating cash flow). 

Councils built up their cash reserves and investments by spending less on capital expenditure than their net operating cash flows. This may have some short-term benefits because it allows councils to respond to risks and absorb foreseeable changes and economic fluctuations without needing to significantly adjust their financial policies. 

But it may reflect a lack of maturity in long-term financial planning if councils are not spending enough on new infrastructure or asset renewal for inter-generational use.

All the council cohorts, except for metropolitan councils, spent less on capital works expenditure than their net operating cash flows in 6 out of the 7 years from 2017–18 to 2023–24. Metropolitan councils spent more on capital works than the net operating cash flows in 4 out of the 7 years. 

In the same period for the audited councils, Wyndham spent less on capital expenditure than its net operating cash flows in all 7 years. Maribyrnong, Northern Grampians and Yarra spent less than their net operating cash flows in 5 out 7 years. Greater Shepparton spent less on capital expenditure than its net operating cash flows in 3 out of 7 years. 

In 2023–24, all cohorts other than regional cities spent more on capital works programs than their net operating cash flows. In that year councils did not receive financial assistance grants from VLGGC in advance and used their cash reserves to supplement their capital works programs.

As discussed in Section 4, the councils we examined have low and declining levels of debt. Consistent with the sector average, the audited councils spent less than 1.25 per cent of their annual revenue on interest payments over the last 8 years. 

Aligning strategic plans

Most audited councils' short-term plans do not fully align with their long-term strategic plans. Councils should align their long-term financial plans to provide consistent guidance for council operations.

Under the Act, councils are expected to work with their communities to develop a range of short, medium and long-term plans as part of the Integrated Strategic Planning and Reporting Framework. This includes a community vision, financial plan and an asset plan that cover a period of 10 years, a council plan that covers 4 years and a budget for each financial year and the subsequent 3 financial years.

All audited councils have the 10-year and 4-year plans required by the Act. Councils use LGV’s templates to guide their long-term financial planning, but some strategic documents are not aligned with each other:

• Greater Shepparton and Wyndham have different capital expenditure forecasts in their 10-year financial plans and the 10-year asset plan strategic documents.
• Maribyrnong’s 10-year capital expenditure forecasts in its financial and asset plans cover different time periods. We could not directly compare the plans.
• Northern Grampians’ 10-year asset plan estimates an average $24.4 million per year for capital expenditure. But, its 10-year financial plan for the same period allows for $14.6 million per year. The asset plan makes plans for capital works that council acknowledges it cannot undertake.

All audited councils have developed detailed 4-year council plans with themes that set out their strategic direction. But how the councils translate their strategic goals into short-term plans and show these in their annual budgets varies:

• Greater Shepparton’s Council Plan identifies its key themes, projects, actions and has associated progress measure.
• Northern Grampians monitors and reports on the progress of its goals and funded strategic actions. But its Council Plan does not include strategic indicators to monitor achievement against its goals.
• Yarra’s Council Plan has high-level strategies to respond to the strategic objectives and includes a list of indicators for each objective. The council plan also includes a list of initiatives under each objective and identifies key priorities for services.
• Maribyrnong’s annual budget identifies the major initiatives to be funded, their performance measures and how they link with the strategic objectives in its Council Plan. It includes high level indicators for some service areas in the budget.

Updating 10 year plans

Updating the 10-year plans annually allows councils to reflect changes in the factors underpinning their assumptions and be transparent to the community. But 4 out of the 5 audited councils do not update their published long-term financial plans and asset plans. Only Yarra publicly updates its 10-year financial plan annually. 

Greater Shepparton, Maribyrnong, Wyndham and Northern Grampians update their internal planning documents and reporting to reflect changes in their assumptions. The 4 councils told us that their interpretation of the Act is that they only need to publish the 10-year financial plan every 4 years, after general council elections. But not annually updating their published long-term plans means the plans:

• are not reflective of current conditions faced by council and are not reliable tools for strategic and operational planning
• are not an accurate source of information for the public and other users of council information seeking to understand council planning
• do not show a 10-year financial outlook, as required by the Act.

Long-term planning processes

All councils' 10-year financial plans are based on a template provided as guidance by LGV. But there are differences in the maturity of councils' long-term planning processes. It is not clear if the 10-year plans are being used for strategic management and control purposes or just being completed because the Act requires it. 

The financial plan uses annual escalations across its income and expenditure items. These escalations are based on information from the Australian Bureau of Statistics, the Victorian Department of Treasury and Finance, the state budget, the ESC for the rate cap and other factors such as expected enterprise bargaining changes to employee costs.

As discussed, audited councils are not consistently updating long-term financial plans and asset plans to reflect the environments councils are operating in.

Also, while LGV has provided model templates for the financial plan and provides guidance for the asset plan, it does not provide model templates for the 10-year asset plan. There are also no templates or guidance for quarterly reporting.

Rate capping

Applying to increase the rate cap is one strategy councils can use to strengthen their financial sustainability.

In 2016, the Victorian Government introduced rate capping which restricts the amount by which councils can raise their rates each year. The Minister for Local Government sets the rate cap annually, based on advice from the ESC.

Councils can apply to the ESC for a higher cap. Since the rate cap system started in 2016 up to 2024–25, the ESC has received 19 applications for higher caps from the sector. It approved 13 of the applications, including 4 applications that covered multiple years. Four councils did not apply the higher rate cap, once approved. 

Of the audited councils, only Wyndham has applied for a rate variation since capping started. Its application to increase the 2016–17 rate cap was not successful.

Audited councils told us they have not requested variations to the cap because of concerns:

• around the financial impact on the community
• about negative community reaction
• about the time and resources needed to meet the ESC's requirements.

The ESC told us that their higher cap application processes provide sufficient flexibility to deal with the different circumstances of individual councils and their communities. 

Audited councils noted that the rate cap does not always reflect the consumer price index (CPI), which means rate increases do not always mirror the rate at which service provision costs change.

From 2015–16 to 2023–24, for 2 of the 5 audited councils, the growth in their total expenses outpaced the growth in their own-sourced revenue.

Figure 21: ESC rate cap compared to CPI

Note: We used the June quarter CPI rates in this graph.

Source: VAGO, based on Australian Bureau of Statistics data and the ESC rate cap advice.

Recommended actions

It is important for the council executive to provide evidence-based recommendations on approaches to support ongoing financial sustainability. But councillors are responsible for the final decision and may not take a recommended action.

The role of the council executive is to advise councillors on financial management matters. But the decisions on council direction and priorities rests with the elected councillors. There are times when councillors make decisions that are contrary to the recommendations of council executive and may have ongoing and cumulative negative impacts on council’s financial health.

For example, the ESC approved rate increases of 1.5 and 1.75 per cent for 2021–2022 and 2022–23. The CPI in those years was 3.8 and 6.1 per cent respectively. Greater Shepparton’s councillors chose not to adopt the ESC recommended rate caps and did not approve rate increases for 2 years.

Greater Shepparton’s executive presented modelling to its councillors showing that not increasing rates in 2021–22 would result in the council losing $13 million in rates revenue over 10 years. In 2022–23, the modelling showed that not increasing rates for a second year would result in a cumulative loss of approximately $28 million over 11 years. The executive briefing said that reduced revenue would impact council’s current and future liquidity, and result in council having to cut some operational activities.

Engaging councillors

Audited councils' councillor briefings on the budget process are timely and comprehensive, but there is scope for councils to improve the engagement process with their councillors.

We reviewed a selection of councillor briefings and responses to a survey by councillors on their experience of engagement with council executives on the budget process. Across the 5 audited councils, we found that the briefings:

• are a mix of written briefings for approval, supported by detailed reports and in-person workshops presenting high-level information on PowerPoint 
• are tailored to meet the context and needs of each council
• can include one-on-one sessions with council executives to answer questions and provide additional information
• provide varying levels of detail to councillors on financial matters, depending on the working styles and experiences of councillors, as well as the priorities and size of councils.

There is no formal advice or guidance from LGV or the Municipal Association of Victoria on how council executives should brief councillors.

Councillors' feedback

We surveyed all councillors from the 5 audited councils to obtain their input on how they interact with council staff to help with their financial oversight responsibilities. We received feedback from 13 out of 43 councillors. The councillors confirmed that the council staff are responsive to their queries and requests for more information. 

Councillors also told us that:

• there is scope for council executives to provide greater clarity with respect to prioritisation of projects, the justification of those projects and alignment with the long-term planning objectives of the council
• there may be an opportunity to refine the briefing process to highlight key messages and synergies across projects
• there is need for additional support for councillors without a financial or accounting background.