Results of 2017–18 Audits: Local Government

Tabled: 19 December 2018

Appendix E. Financial sustainability risk indicators

This appendix sets out the definitions and criteria we used to assess and report on financial sustainability risks across the local government sector.

These financial sustainability indicators are only indicative, highlighting ongoing and emerging financial sustainability risks at a sector and cohort level—metropolitan, interface, regional, large shire and small shire councils.

A definitive view of financial sustainability requires a more holistic analysis beyond historical financial reporting, taking into account forward-looking financial forecasts and plans, operations and an entity's environment.

Figure E1 shows the indicators we used to assess the financial sustainability risks of the local councils in this report. These indicators should be considered collectively and are more useful when assessed over time as part of trend analysis.

Figure E1
Financial sustainability risk indicators

Indicator

Definition

Formula

Profitability indicators

Net result (%)

This measures how much of each dollar collected as revenue translates to net result. A positive result indicates a surplus, and the larger the percentage, the stronger the result.

Net result / Total revenue

Adjusted underlying result

This measures an entity ability to generate surplus in the ordinary course of business—excluding non-recurrent capital grants, non-monetary asset contributions, and other contributions to fund capital expenditure from net result. A surplus or increasing surplus suggests an improvement in the operating position.

Adjusted underlying surplus (or deficit) / Adjusted underlying revenue

Financing indicators

Liquidity (ratio)

This measures an entity's ability to pay existing liabilities in the next 12 months. A ratio greater than 1.0 means there are more cash and liquid assets than short-term liabilities.

Current assets / Current liabilities

Internal financing (%)

This measures an entity's ability to finance capital works using cash generated by its operating cash flows. The higher the percentage, the greater the ability for the entity to finance capital works from its own funds.

Net operating cash flow / Net capital expenditure

Indebtedness (%)

This assesses an entity's ability to pay the principal and interest on borrowings, as and when they fall due, from the funds it generates. The lower the ratio, the less revenue the entity is required to use to repay its total debt.

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

Non-current liabilities / Own-sourced revenue

Asset renewal and maintenance indicators

Capital replacement (ratio)

This compares of the rate of spending on infrastructure, property, plant and equipment, and intangibles with its depreciation and amortisation. This is a long-term indicator, as capital expenditure can differ in the short term if there are insufficient funds available from operations, and borrowing is not an option. A ratio less than 1.0 means the spending on capital works has not kept pace with consumption of assets.

Cash outflows for property, plant and equipment / Depreciation

Renewal gap (ratio)

This compares the rate of spending on existing assets through renewing, restoring, and replacing existing assets with depreciation. Ratios higher than 1.0 indicate that spending on existing assets is faster than the depreciation rate.

Renewal and upgrade expenditure / Depreciation

Source: VAGO.

Financial sustainability risk assessment criteria

The financial sustainability risk of each local council has been assessed using the criteria outlined in Figure E2.

Figure E2
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.

Net result, 2013–14 to 2020–21

Figure E3
Metropolitan councils

NET RESULT, 2013–14 TO 2020–21 for Metropolitan councils

Source: VAGO.

Figure E4
Interface councils

NET RESULT, 2013–14 TO 2020–21 for interface councils

Source: VAGO.

Figure E5
Regional councils

NET RESULT, 2013–14 TO 2020–21 for regional councils

Source: VAGO.

Figure E6
Large shire councils

NET RESULT, 2013–14 TO 2020–21 for large shire councils

Source: VAGO.

Figure E7
Small shire councils

NET RESULT, 2013–14 TO 2020–21 for small shire councils

Source: VAGO.

Adjusted underlying result, 2014–15 to 2020–21

Figure E8
Metropolitan councils

ADJUSTED UNDERLYING RESULT, 2014–15 TO 2020–21 for metropolitan councils

Source: VAGO.

Figure E9
Interface councils

ADJUSTED UNDERLYING RESULT, 2014–15 TO 2020–21 for interface councils

Source: VAGO.

Figure E10
Regional councils

ADJUSTED UNDERLYING RESULT, 2014–15 TO 2020–21 for regional councils

Source: VAGO.

Figure E11
Large shire councils

ADJUSTED UNDERLYING RESULT, 2014–15 TO 2020–21 for large shire councils

Source: VAGO.

Figure E12
Small shire councils

ADJUSTED UNDERLYING RESULT, 2014–15 TO 2020–21 for small shire councils

Source: VAGO.

Liquidity, 2013–14 to 2020–21

Figure E13
Metropolitan councils

LIQUIDITY, 2013–14 TO 2020–21 for metropolitan councils

Source: VAGO.

Figure E14
Interface councils

LIQUIDITY, 2013–14 TO 2020–21 for interface councils

Source: VAGO.

Figure E15
Regional councils

LIQUIDITY, 2013–14 TO 2020–21 for regional councils

Source: VAGO.

Figure E16
Large shire councils

LIQUIDITY, 2013–14 TO 2020–21 for large shire councils

Source: VAGO.

Figure E17
Small shire councils

LIQUIDITY, 2013–14 TO 2020–21 for small shire councils

Source: VAGO.

Internal financing, 2013–14 to 2020–21

Figure E18
Metropolitan councils

INTERNAL FINANCING, 2013–14 TO 2020–21 for metropolitan councils

Source: VAGO.

Figure E19
Interface councils

INTERNAL FINANCING, 2013–14 TO 2020–21 for interface councils

Source: VAGO.

Figure E20
Regional councils

INTERNAL FINANCING, 2013–14 TO 2020–21 for regional councils

Source: VAGO.

Figure E21
Large shire councils

INTERNAL FINANCING, 2013–14 TO 2020–21 for large shire councils

Source: VAGO.

Figure E22
Small shire councils

INTERNAL FINANCING, 2013–14 TO 2020–21 for small shire councils

Source: VAGO.

Indebtedness, 2013–14 to 2020–21

Figure E23
Metropolitan councils

INDEBTEDNESS, 2013–14 TO 2020–21 for metropolitan councils

Source: VAGO.

Figure E24
Interface councils

INDEBTEDNESS, 2013–14 TO 2020–21 for interface councils

Source: VAGO.

Figure E25
Regional councils

INDEBTEDNESS, 2013–14 TO 2020–21 for regional councils

Source: VAGO.

Figure E26
Large shire councils

INDEBTEDNESS, 2013–14 TO 2020–21 for large shire councils

Source: VAGO.

Figure E27
Small shire councils

INDEBTEDNESS, 2013–14 TO 2020–21 for small shire councils

Source: VAGO.

Capital replacement, 2013–14 to 2020–21

Figure E28
Metropolitan councils

CAPITAL REPLACEMENT, 2013–14 TO 2020–21 for metropolitan councils

Source: VAGO.

Figure E29
Interface councils

CAPITAL REPLACEMENT, 2013–14 TO 2020–21 for interface councils

Source: VAGO.

Figure E30
Regional councils

CAPITAL REPLACEMENT, 2013–14 TO 2020–21 for regional councils

Source: VAGO.

Figure E31
Large shire councils

CAPITAL REPLACEMENT, 2013–14 TO 2020–21 for large shire councils

Source: VAGO.

Figure E32
Small shire councils

CAPITAL REPLACEMENT, 2013–14 TO 2020–21 for small shire councils

Source: VAGO.

Renewal gap, 2013–14 to 2020–21

Figure E33
Metropolitan councils

RENEWAL GAP, 2013–14 TO 2020–21 for metropolitan councils

Source: VAGO.

Figure E34
Interface councils

RENEWAL GAP, 2013–14 TO 2020–21 for interface councils

Source: VAGO.

Figure E35
Regional councils

RENEWAL GAP, 2013–14 TO 2020–21 for regional councils

Source: VAGO.

Figure E36
Large shire councils

RENEWAL GAP, 2013–14 TO 2020–21 for large shire councils

Source: VAGO.

Figure E37
Small shire councils

RENEWAL GAP, 2013–14 TO 2020–21 for small shire councils

Source: VAGO.

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