Results of 2018‒19 Audits: Local Government

Tabled: 27 November 2019

4 Financial outcomes and sustainability

In this Part, we summarise the financial performance and position of all Victorian councils for the year ended 30 June 2019 and comment on their financial sustainability.

Appendix D lists our financial sustainability indicators and risk assessment criteria. We publish the detailed data for each council from 2014–15 to 2018–19 on our website, as part of our interactive data dashboard.

4.1 Conclusion

Generally, Victorian councils continue to be financially sound.

At 30 June 2019, most councils—particularly metropolitan councils—continue to demonstrate strong financial performance, positive operating results, strong liquidity ratios and low debt levels.

While the sector demonstrates relatively weaker long-term financial sustainability, the relevant indicators still represent a strong financial position.

4.2 Overview

Figure 4A summarises the sector's seven financial sustainability risk indicators at 30 June 2019, by cohort.

Figure 4A
Financial sustainability risk indictors by cohort, 30 June 2019

Indicator

Average across councils for year ended 30 June 2019

All councils

Metro

Interface

Regional

Large

Small

Profitability indicators

Net result margin

per cent

17.26%

13.51%

34.32%

19.34%

15.80%

13.90%

Adjusted underlying result

per cent

4.25%

9.09%

5.49%

2.43%

1.98%

1.29%

Financing indicators

Liquidity

ratio

3.20

2.71

3.66

3.77

3.10

3.77

Internal financing

per cent

159%

223%

133%

136%

135%

134%

Indebtedness

per cent

17.82%

10.45%

17.38%

32.07%

22.53%

14.34%

Asset renewal and maintenance indicators

Capital replacement

ratio

1.55

1.87

2.19

1.48

1.33

1.14

Renewal gap

ratio

1.16

1.22

1.09

0.95

1.22

1.18

Key: = high risk, = medium risk, = low risk.
Note: We used draft 30 June 2019 figures for West Wimmera Shire Council as it has not finalised its financial report at the date of this report's publication.
Source: VAGO.

4.3 Financial performance highlights

In 2018–19, Victorian councils generated $11.6 billion in revenue, against expenditure of $9.0 billion—generating a net surplus of $2.6 billion.

Figure 4B shows that the sector's revenues and expenses have consistently increased since 2014–15. Total revenue has grown by approximately 6 per cent compounded annually, while expenses have increased by approximately 4 per cent compounded annually, over the same time period.

Figure 4B
Financial performance of the sector, 2014–15 to 2018–19

Figure 4B shows financial performance of the sector, 2014–15 to 2018–19

Source: VAGO.

While revenue has increased consistently since 2014–15, its composition has changed slightly—most notably since the introduction of rate capping on 1 July 2016.

Figure 4C highlights the slight reduction in the proportion of the sector's revenue generated by rates since 2016–17. Councils have mostly offset this reduction through an increased reliance on contributions. There has also been a slight reduction since 2014–15 of user fees and fines—as a proportion of total revenue—which suggests the sector is targeting revenue from sources outside of ratepayers and service users.

Figure 4C
Revenue composition for the sector, 2014–15 to 2018–19

Figure 4C shows revenue composition for the sector, 2014–15 to 2018–19

Source: VAGO.

Conversely, Figure 4D highlights that the composition of expenditure has not changed significantly since 2014–15.

Figure 4D
Expense composition for the sector, 2014–15 to 2018–19

Figure 4D shows expense composition for the sector, 2014–15 to 2018–19

Source: VAGO.

Profitability indicators

Our review of profitability indicators assesses the ability of councils to fund their operations from their surpluses. Consistent surpluses ensure the continued operation of services and satisfaction of community needs.

While impacted by the introduction of rate capping and an increase in waste and recycling costs, the sector as a whole continues to generate a surplus from operations, as highlighted by Figures 4A and 4B.

Metropolitan councils continue to report consistently strong adjusted underlying results. In contrast, regional, large and small councils experience more fluctuation in their results—with 33 per cent of these councils experiencing a negative result for 2018–19 (31 per cent in 2017–18).

Figure 4E shows the adjusted underlying result by cohort over the last five years.

Figure 4E
Adjusted underlying surplus analysis by cohort, 2014–15 to 2018–19

 

Source: VAGO.

4.4 Financial position highlights

Net assets held by the sector increased to $107.3 billion in 2018–19 from $104.9 billion in 2017–18.

Figure 4F highlights that the sector has steadily increased its net asset position over the last five years. Metropolitan councils hold 50 per cent of total assets (52 per cent in 2017–18).

Figure 4F
Total assets, total liabilities and net assets for the sector, 2014–15 to 2018–19

Figure 4F shows the total assets, total liabilities and net assets for the sector, 2014–15 to 2018–19

Source: VAGO.

Figure 4G illustrates that the sector's assets mostly comprise land, buildings and infrastructure, which are used to deliver services to the community. Given their community service nature, these assets do not generate income, nor are they easily sold to fund operational requirements. These assets also require significant expenditure to maintain their service capacity to the community. Accordingly, they require significant monitoring, oversight and investment by the sector to ensure they meet community needs in the long term.

Figure 4G
Composition of total assets for the sector, 2014–15 to 2018–19

Figure 4G shows composition of total assets for the sector, 2014–15 to 2018–19

Source: VAGO.

Financing indicators

Our review of the sector's financing indicators assesses the ability of councils to repay short-term liabilities, fund capital expenditure from operating cashflows, and repay borrowings. Councils need to monitor their cash position to ensure they can meet their obligations as they fall due.

Liquidity

The sector continues to maintain a strong liquidity position—with $5.7 billion held in cash at 30 June 2019 ($5.1 billion at 30 June 2018). The majority of this cash is either set aside for future intended capital works or is restricted by a contract with an external party. Figures 4H and 4I show the results of the liquidity indicator, and the total cash and term deposits reported by councils by cohort over the last five years.

Figure 4H
Liquidity analysis by cohort, 2014–15 to 2018–19

 

Source: VAGO.

Figure 4I
Cash and term deposit balances by cohort, 2014–15 to 2018–19

Figure 4I shows cash and term deposit balances by cohort, 2014–15 to 2018–19

Source: VAGO.

Internal financing

AASB 15 Revenue from Contracts with Customers and AASB 1058 Income of Not-for-Profit Entities may affect the internal financing indicator from 2019–20 onwards as councils will need to reassess the period in which they recognise revenue.

Councils receive a large portion of Commonwealth grant funding towards the end of the financial year, impacting the underlying result and, ultimately, the internal financing indicator. The overall sector result for 2018–19 of 159 per cent is consistent with previous years (145 per cent for 2017–18).

Figure 4J shows the results of the internal financing indicator by cohort over the last five years.

Figure 4J
Internal financing indicator analysis by cohort, 2014–15 to 2018–19

 

Source: VAGO.

Indebtedness

The sector continues to hold low levels of debt, evidenced by borrowing costs accounting for 0.5 per cent of total revenue and 1 per cent of rates and charges for 2018–19 (0.5 per cent and 1 per cent respectively for 2017–18).

Due to their major infrastructure plans, metropolitan and interface councils hold the majority of debt within the sector, at 61 per cent of total debt held at 30 June 2019 (62 per cent at 30 June 2018).

Figures 4K and 4L show the results of the indebtedness indicator, and the total borrowings reported by cohort, over the last five years.

Figure 4K
Indebtedness indicator analysis by cohort, 2014–15 to 2018–19

 

Source: VAGO.

Figure 4L
Borrowings balance by cohort, 2014–15 to 2018–19

Figure 4L shows borrowings balance by cohort, 2014–15 to 2018–19

Source: VAGO.

Asset renewal and maintenance indicators

Councils need to effectively and efficiently maintain and renew their infrastructure, property, plant, and equipment to service their communities and meet public demand.

Our review of the asset renewal and maintenance indicators assesses the adequacy of council spending on infrastructure, property, plant and equipment.

Capital replacement

Despite significant rising sector costs and fluctuating adjusted underlying results—due to rising waste and recycling costs and the impact of rate capping—councils have still prioritised meeting the long-term needs of their communities through capital expenditure, as indicated by the capital replacement ratios across all cohorts being above one.

Figures 4M and 4N show the results of the capital replacement indicator, and the total infrastructure, property, plant and equipment reported by councils by cohort over the last five years.

Figure 4M
Capital replacement indicator analysis by cohort, 2014–15 to 2018–19

 

Source: VAGO.

Figure 4N
Infrastructure, property, plant and equipment balance by cohort, 2014–15 to 2018–19

Figure 4N shows infrastructure, property, plant and equipment balance by cohort, 2014–15 to 2018–19

Source: VAGO.

The disparity in capital replacement and maintenance between metropolitan and interface councils compared to their regional, large and small council counterparts continues. This arises from differences in population growth, the demand for infrastructure by their municipalities, and available resources.

While fluctuating adjusted underlying results by regional, large and small councils impact their ability to plan in the long-term, they still need to implement strategies to continue to service community needs.

Renewal gap

The renewal gap indicator supports a continual prioritisation of asset renewal and maintenance by councils—consistent with the capital replacement indicator. Regional councils have a renewal gap indicator of 0.95, indicating spending on existing assets is slower than depreciation.

Figure 4O shows the results of the renewal gap indicator across the sector for the last five years.

Figure 4O
Renewal gap indicator analysis by cohort, 2014–15 to 2018–19

 

Source: VAGO.

Capital spending

During the year ended 30 June 2019, the sector spent $2.7 billion in total on new assets ($2.2 billion in 2017–18). This investment was largely driven by the surpluses generated for the year and is largely consistent with historic trends. While councils receive capital grants from various sources, these grants are not significant compared to the sector's capital spend. This highlights the importance of councils generating sufficient surpluses to fund long-term service needs, so as to not rely on borrowed funds.

Figure 4P outlines the difference between capital grants and other profit sources, against total capital expenditure.

Figure 4P
Capital spending analysis, 2014–15 to 2018–19

Figure 4P shows capital spending analysis, 2014–15 to 2018–19

Note: IPPE = infrastructure, property, plant and equipment.
Source: VAGO.

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