Local Government: 2015–16 Audit Snapshot

Tabled: 24 November 2016

Appendix D. Financial sustainability risk indicators

Figure D1 lists the indicators used in assessing the financial sustainability risks of local councils in Part 3 of this report. These indicators should be considered collectively, and are more useful when assessed over time as part of a trend analysis.

Figure D1

Financial sustainability risk indicators

Indicator

Formula

Description

Net result (%)

Net result / Total revenue

A positive result indicates a surplus, and the larger the percentage, the stronger the result. A negative result indicates a deficit. Operating deficits cannot be sustained in the long term.

The net result and total revenue are obtained from the comprehensive operating statement.

Liquidity (ratio)

Current assets / Current liabilities

This measures the ability to pay existing liabilities in the next 12 months.

A ratio of one or more means there are more cash and liquid assets than short-term liabilities.

Internal financing (%)

Net operating cash flow / Net capital expenditure

This measures the ability of an entity to finance capital works from generated cash flow.

The higher the percentage, the greater the ability for the entity to finance capital works from their own funds.

Net operating cash flow and net capital expenditure are obtained from the cash flow statement.

Indebtedness (%)

Non-current liabilities / own-sourced revenue

Comparison of non-current liabilities (mainly comprising borrowings) to own-sourced revenue. The higher the percentage, the less the entity is able to cover non-current liabilities from the revenues the entity generates itself.

Own-sourced revenue is used, rather than total revenue, because it does not include grants or contributions.

Capital replacement (ratio)

Cash outflows for property, plant and equipment / Depreciation

Comparison of the rate of spending on infrastructure with its depreciation. Ratios higher than 1:1 indicate that spending is faster than the depreciation rate.

This is a long-term indicator, as capital expenditure can be deferred in the short term if there are insufficient funds available from operations, and borrowing is not an option. Cash outflows for infrastructure are taken from the cash flow statement. Depreciation is taken from the comprehensive operating statement.

Renewal gap (ratio)

Renewal and upgrade expenditure/depreciation

Comparison of the rate of spending on existing assets through renewing, restoring, and replacing existing assets with depreciation. Ratios higher than 1:1 indicate that spending on existing assets is faster than the depreciation rate.

Similar to the investment gap, this is a long-term indicator, as capital expenditure can be deferred in the short term if there are insufficient funds available from operations, and borrowing is not an option. Renewal and upgrade expenditure are taken from the statement of capital works. Depreciation is taken from the comprehensive operating statement.

Source: VAGO.

The analysis of financial sustainability risk in this report reflects on the position of each local council.

Financial sustainability risk assessment criteria

The financial sustainability risk of each local council has been assessed using the criteria outlined in Figure D2.

Figure D2

Financial sustainability risk indicators—risk assessment criteria

Risk

Net result

Liquidity

Internal financing

Indebtedness

Capital replacement

Renewal gap

High

Less than negative 10%

Insufficient revenue is being generated to fund operations and asset renewal.

f38b8b

Less than 0.75



Immediate sustainability issues with insufficient current assets to cover liabilities.

Less than 75%

Limited cash generated from operations to fund new assets and asset renewal.

More than 60%

Potentially long‑term concern over ability to repay debt levels from own-source revenue.

Less than 1.0



Spending on capital works has not kept pace with consumption of assets.

Less than 0.5



Spending on existing assets has not kept pace with consumption of these assets.

Medium

Negative 10%– 0%

A risk of long‑term run down to cash reserves and inability to fund asset renewals.

0.75–1.0



Need for caution with cash flow, as issues could arise with meeting obligations as they fall due.

75–100%



May not be generating sufficient cash from operations to fund new assets.

40–60%



Some concern over the ability to repay debt from own‑source revenue.

1.0–1.5



May indicate spending on asset renewal is insufficient.

0.5–1.0



May indicate insufficient spending on renewal of existing assets.

Low

More than 0%Generating surpluses consistently.

More than 1.0



No immediate issues with repaying short‑term liabilities as they fall due.

More than 100%

Generating enough cash from operations to fund new assets.

40% or less



No concern over the ability to repay debt from own-source revenue.

More than 1.5



Low risk of insufficient spending on asset renewal.

More than 1.0



Low risk of insufficient spending on asset base.

Source: VAGO.

The financial sustainability risk for each council, for the financial years ended 30 June 2012 to 2016, are shown in Figures D3 to D32. For consolidated financial statements, amounts obtained for calculating financial sustainability indicators only relate to council. If these were not available for a complete data set, consolidated figures have been used.

Metropolitan councils

Figure D3

Metropolitan councils, net result 2012– 2016

Metropolitan councils, net result 2012– 2016

Source: VAGO.

Figure D4

Metropolitan councils, liquidity 2012– 2016

Metropolitan councils, liquidity 2012– 2016

Source: VAGO.

Figure D5

Metropolitan councils, internal financing 2012– 2016

Metropolitan councils, internal financing 2012– 2016

Source: VAGO.

Figure D6

Metropolitan councils, indebtedness 2012– 2016

Metropolitan councils, indebtedness 2012– 2016

Source: VAGO.

Figure D7

Metropolitan councils, capital replacement 2012– 2016

Metropolitan councils, capital replacement 2012– 2016

Source: VAGO.

Figure D8

Metropolitan councils, renewal gap 2012– 2016

Metropolitan councils, renewal gap 2012– 2016

Source: VAGO.

Interface councils

Figure D9

Interface councils, net result 2012– 2016

Interface councils, net result 2012– 2016

Source: VAGO.

Figure D10

Interface councils, liquidity 2012– 2016

Interface councils, liquidity 2012– 2016

Source: VAGO.

Figure D11

Interface councils, internal financing 2012– 2016

Interface councils, internal financing 2012– 2016

Source: VAGO.

Figure D12

Interface councils, indebtedness 2012– 2016

Interface councils, indebtedness 2012– 2016

Source: VAGO.

Figure D13

Interface councils, capital replacement 2012– 2016

Interface councils, capital replacement 2012– 2016

Source: VAGO.

Figure D14

Interface councils, renewal gap 2012– 2016

Interface councils, renewal gap 2012– 2016

Source: VAGO.

Regional city councils

Figure D15

Regional city councils, net result 2012– 2016

Regional city councils, net result 2012– 2016

Source: VAGO.

Figure D16

Regional city councils, liquidity 2012– 2016

Regional city councils, liquidity 2012– 2016

Source: VAGO.

Figure D17

Regional city councils, internal financing 2012– 2016

Regional city councils, internal financing 2012– 2016

Source: VAGO.

Figure D18

Regional city councils, indebtedness 2012– 2016

Regional city councils, indebtedness 2012– 2016

Source: VAGO.

Figure D19

Regional city councils, capital replacement 2012– 2016

Regional city councils, capital replacement 2012– 2016

Source: VAGO.

Figure D20

Regional city councils, renewal gap 2012– 2016

Regional city councils, renewal gap 2012– 2016

Note: N/A = information not available.

Source: VAGO.

Large shire councils

Figure D21

Large shire councils, net result 2012– 2016

Large shire councils, net result 2012– 2016

Source: VAGO.

Figure D22

Large shire councils, liquidity 2012– 2016

Large shire councils, liquidity 2012– 2016

Source: VAGO.

Figure D23

Large shire councils, internal financing 2012– 2016

Large shire councils, internal financing 2012– 2016

Source: VAGO.

Figure D24

Large shire councils, indebtedness 2012– 2016

Large shire councils, indebtedness 2012– 2016

Source: VAGO.

Figure D25

Large shire councils, capital replacement 2012– 2016

Large shire councils, capital replacement 2012– 2016

Source: VAGO.

Figure D26

Large shire councils, renewal gap 2012– 2016

Large shire councils, renewal gap 2012– 2016

Note: N/A = information not available.

Source: VAGO.

Small shire councils

Figure D27

Small shire councils, net result 2012– 2016

Small shire councils, net result 2012– 2016

Source: VAGO.

Figure D28

Small shire councils, liquidity 2012– 2016

Small shire councils, liquidity 2012– 2016

Source: VAGO.

Figure D29

Small shire councils, internal financing 2012– 2016

Small shire councils, internal financing 2012– 2016

Source: VAGO.

Figure D30

Small shire councils, indebtedness 2012– 2016

Small shire councils, indebtedness 2012– 2016

Source: VAGO.

Figure D31

Small shire councils, capital replacement 2012– 2016

Small shire councils, capital replacement 2012– 2016

Source: VAGO.

Figure D32

Small shire councils, renewal gap 2012– 2016

Small shire councils, renewal gap 2012– 2016

Source: VAGO.

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