Results of 2016–17 Audits: Local Government

Tabled: 29 November 2017

Appendix F. Financial sustainability risk indicators

Figure F1 lists the indicators used in assessing the financial sustainability risks of local councils in Part 4 of this report. These indicators should be considered collectively, and are more useful when assessed over time as part of a trend analysis.

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

Figure F1
Financial sustainability risk indictors

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.

Adjusted underlying result(a)

Adjusted underlying surplus (or deficit) / Adjusted underlying revenue

Indicator of the broad objective that an adjusted underlying surplus should be generated in the ordinary course of business. A surplus or increasing surplus suggests an improvement in the operating position.

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.

(a) This is a new financial sustainability risk indicator in this report. The calculation is consistent with councils' performance statements.

Source: VAGO.

Financial sustainability risk assessment criteria

The financial sustainability risk of each local council has been assessed using the criteria outlined in Figure F2.

Figure F2
Financial sustainability risk indicators—risk assessment criteria

Risk

Net result

 

Adjusted underlying 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.

Less than 0%

Insufficient surplus being generated to fund operations

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%–5%

Surplus being generated to fund operations

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 5%

Generating strong surpluses to fund operations

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 2013 to 2020, are shown in Figures F3 to F37. For consolidated financial statements, amounts obtained for calculating financial sustainability indicators only relate to council.

Metropolitan councils

Figure F3
Metropolitan councils, net result 2013–2020

Fig-F3.PNG

Source: VAGO.

Figure F4
Metropolitan councils, adjusted underlying result 2015–2020

Fig-F4.PNG

Source: VAGO.

Figure F5
Metropolitan councils, liquidity 2013–2020

Fig-F5.PNG

Source: VAGO.

Figure F6
Metropolitan councils, internal financing 2013–2020

Fig-F6.PNG

Source: VAGO.

Figure F7
Metropolitan councils, indebtedness 2013–2020

Fig-F7.PNG

Source: VAGO.

Figure F8
Metropolitan councils, capital replacement 2013–2020

Fig-F8.PNG

Source: VAGO.

Figure F9
Metropolitan councils, renewal gap 2013–2020

Fig-F9.PNG

Source: VAGO.

Interface councils

Figure F10
Interface councils, net result 2013–2020

Fig-F10.PNG

Source: VAGO.

Figure F11
Interface councils, adjusted underlying result 2015–2020

Fig-F11.PNG

Source: VAGO.

Figure F12
Interface councils, liquidity 2013–2020

Fig-F12.PNG

Source: VAGO.

Figure F13
Interface councils, internal financing 2013–2020

Fig-F13.PNG

Source: VAGO.

Figure F14
Interface councils, indebtedness 2013–2020

Fig-F14.PNG

Source: VAGO.

Figure F15
Interface councils, capital replacement 2013–2020

Fig-F15.PNG

Source: VAGO.

Figure F16
Interface councils, renewal gap 2013–2020

Fig-F16.PNG

Source: VAGO.

Regional city councils

Figure F17
Regional city councils, net result 2013–2020

Fig-F17.PNG

Source: VAGO.

Figure F18
Regional city councils, adjusted underlying result 2015–2020

Fig-F18.PNG

Source: VAGO.

Figure F19
Regional city councils, liquidity 2013–2020

Fig-F19.PNG

Source: VAGO.

Figure F20
Regional city councils, internal financing 2013–2020

Fig-F19.PNG

Source: VAGO.

Figure F21
Regional city councils, indebtedness 2013–2020

Fig-F21.PNG

Source: VAGO.

Figure F22
Regional city councils, capital replacement 2013–2020

Fig-F22.PNG

Source: VAGO.

Figure F23
Regional city councils, renewal gap 2013–2020

Fig-F23.PNG

n/a = not able to provide an indicator result

Source: VAGO.

Large shire councils

Figure F24
Large shire councils, net result 2013–2020

Fig-F24.PNG

Source: VAGO.

Figure F25
Large shire councils, adjusted underlying result 2015–2020

Fig-F25.PNG

Source: VAGO.

Figure F26
Large shire councils, liquidity 2013–2020

Fig-F26.PNG

Source: VAGO.

Figure F27
Large shire councils, internal financing 2013–2020

Fig-F27.PNG

Source: VAGO.

Figure F28
Large shire councils, indebtedness 2013–2020

Fig-F28.PNG

Source: VAGO.

Figure F29
Large shire councils, capital replacement 2013–2020

Fig-F29.PNG

Source: VAGO.

Figure F30
Large shire councils, renewal gap 2013–2020

Fig-F30.PNG

Source: VAGO.

Small shire councils

Figure F31
Small shire councils, net result 2013–2020

Fig-F31.PNG

Source: VAGO.

Figure F32
Small shire councils, adjusted underlying result 2015–2020

Fig-F32.PNG

Source: VAGO.

Figure F33
Small shire councils, liquidity 2013–2020

Fig-F33.PNG

Source: VAGO.

Figure F34
Small shire councils, internal financing 2013–2020

Fig-F34.PNG

Source: VAGO.

Figure F35
Small shire councils, indebtedness 2013–2020

Fig-F35.PNG

Source: VAGO.

Figure F36
Small shire councils, capital replacement 2013–2020

Fig-F36.PNG

Source: VAGO.

Figure F37
Small shire councils, renewal gap 2013–2020

Fig-F37.PNG

Note: n/a = not able to provide an indicator result.

Source: VAGO.

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